The circumstances in which Quantum entered into the Services Agreement with Schenker are relevant to at least two issues raised by the parties. The first concerns the somewhat unusual commercial relationship between Quantum and Schenker, whereby Quantum entered into a sub-contract with Schenker to provide technical services to a client of Schenker, Fuji Xerox Australia (FXA), in circumstances where Quantum's employees undertook the work required by the subcontract at Schenker's premises. For reasons that will appear, Quantum's commercial interests under the sub-contract were particularly vulnerable to Schenker becoming able to undertake the work the subject of the subcontract itself by employing Quantum's employees who carried out the work for Quantum. The second issue is that Quantum has claimed that, by reason of his involvement in the negotiation of the terms of the Services Agreement, Mr Murugiah must have been aware of the terms of clause 13.13 before he commenced to seek employment by Schenker.
The evidence suggests that Quantum provides technical services to electronics companies and their customers within the Asia-Pacific region. The companies to which Quantum provides services include Dell, Apple, Nokia, Vodafone, Technicolor, Google and HTC, among others. Quantum has approximately 650 employees in the Asia Pacific region. There are approximately 200 employees in Australia.
The services provided by Quantum include pre-sales services including configurations and installation of software, and post-sales services including warranty claims, repairs and refurbishments. Quantum also provides non-technical services such as packaging and the inclusion of accessories and information guides.
Schenker apparently is a global provider of supply chain and logistics services, through land transport, worldwide air and ocean freight and warehousing services. It operates worldwide by providing services to various sectors, including automotive, technology, consumer goods, trade fair, special transport and special events logistics. Schenker has about 2000 locations and more than 72,000 employees around the world.
Schenker has a warehouse facility at an address in Hoxton Park. Quantum has approximately 93 of its employees located at Schenker's Hoxton Park facility. Approximately 15 of those employees are permanent employees. The four employees who do the work required by the Services Agreement all work at the Hoxton Park facility, and are all permanent full-time employees.
Mr Murugiah was Quantum's business manager who was directly responsible for Quantum's operations at the Hoxton Park facility, which were the premises at which Mr Murugiah worked. It is said that Mr Murugiah had dealings with Schenker's employees at the Hoxton Park facility on a day-to-day basis.
Quantum's managing director, Mr Prem Reddy, said that on or about 6 April 2018, Mr Michael Hensley of Schenker approached him to discuss a business opportunity involving FXA. On 9 April 2018, at a meeting between representatives of the two companies, Mr Hensley said that FXA wanted to outsource its technical and logistics services, which it had been doing in-house. FXA had agreed to work with Schenker and Schenker wanted to outsource the technical services to Quantum to enhance the "partnership" between the two companies. The parties then negotiated the terms of the Services Agreement. Clause 13.13 was inserted into a draft on 20 April 2018 at the request of Quantum.
Notes of meetings prepared by Mr Reddy on 9 and 10 April 2018 provide some information concerning the nature of the proposed commercial arrangement between Quantum and Schenker. Mr Reddy did not explain the notes in any detail, but it does appear that it was then envisaged that the work for FXA would proceed in three separate phases commencing in May, and on 31 October and mid to late November 2018. The expected staff required for the three phases was four, 20 to 25, and 10 yielding a total of about 35 to 40.
Mr Reddy said that Mr Murugiah attended the meeting on 10 April 2018, and Mr Reddy annexed emails to his second affidavit that showed Mr Murugiah being involved in the negotiations. That involvement seemed to start on about 10 May 2018, and appears to have involved Mr Murugiah compiling a scope of work document. It seems that the document was completed after Quantum and Schenker had started to provide their services to FXA, and I suspect that it ultimately consisted of the document called "Process Flow", which forms part of Exhibit A to the Services Agreement. The scope of work document appears to concern the process that would be adopted in performing the Services Agreement, and not its commercial terms. Mr Murugiah provided a copy of a "generic process flow chart" to Mr Hensley on 11 May 2018. Subsequent emails concerning the commercial terms appear to have excluded Mr Murugiah, save that on 14 May 2018 Mr Reddy asked Mr Murugiah: "Please check the Scope to ensure you are ok with it". Finally, on 15 May 2018 Mr Reddy sent an email to Mr Rakesh Khanna, Quantum's Finance & Human Resources Manager, with a copy to Mr Murugiah, in which he asked,:
Rakesh/Sunther,
Can you please do a quick review to ensure everything we agreed to, is included. I'll print a copy and sign, which Rakesh can scan and forward if we are all happy…
This evidence is inconclusive as to whether Mr Murugiah was aware of the terms of clause 13.13. His positive involvement concerned the preparation of the scope of works document. Mr Murugiah could well have thought that clause 13.13 was part of the commercial 'boilerplate' provisions in the agreement.
I will return to consider whether it has been shown that Mr Murugiah was aware of the effect of clause 13.13 later, when I deal with the events that occurred after Quantum became aware that Mr Murugiah intended to accept employment by Schenker.
[2]
Terms of the Services Agreement
The Services Agreement was signed by Mr Reddy on 15 May 2018 and by a representative of Schenker on 17 May 2018.
It appears that the template used for the preparation of the Services Agreement was Schenker's standard procurement contract for minor works.
Relevantly, clause 1 provided:
1. Procurement scope.
1.1. By entering into this Agreement DB Schenker undertakes to purchase Goods and or Services from the Seller in accordance with the terms of this Agreement, any attached Exhibits or any Purchase Order raised by DB Schenker and the DB Schenker GPCs.
1.2. Nothing in this Agreement commits a minimum and or maximum scope of the purchase or headcount requirement.
1.3. Words not herein defined shall be read in line with the GPCs. If this Agreement conflicts with any GPC term, the agreement shall prevail to the extent of the conflict.
Clause 2 provided for an initial term commencing on 1 May 2018 and expiring on 30 April 2020. Clause 2.2 gave the parties a right to terminate for material breach on 30 days' notice, and clause 2.4 provided for termination in the event that the underlying agreement between Schenker and FXA was terminated. Clause 2.3 provided:
2.3. Should DB Schenker be awarded the extended term by FXA, DB Schenker will extend the term of this Agreement with the Seller should parties agree upon mutually acceptable commercial terms.
Clause 3 provided for rates and payment terms.
Exhibit A to the Services Agreement was called "Scope of Procurement". It contained a technical description of the services to be provided by Quantum, using terms that would have been understandable to the technicians who were to provide the services.
Exhibit B to the Services Agreement was called "Rate Schedule" and set out the rates payable for certain types of services.
Exhibit C was called "General Purchasing Conditions".
It seems from clause 2.1 of Exhibit C that Schenker would issue a purchase order in relation to individual services required and those orders would be accepted by Quantum.
Clause 13.5 of the general purchasing conditions provided:
13.5. Exclusivity. DB Schenker in no way warrants the exclusivity of supply for the Supplier or guarantees any minimum volume or purchase commitment.
The term that is most material to the present dispute, clause 13.13 of the General Purchasing Conditions, provided:
13.13. Solicitation for Employment. The parties agree that neither party and their associated entities, sub-contractors or their employees will employ or approach for employment, the employees or ex-employees of the other party, during the term and until a minimum period of six (6) months following the termination of this agreement.
[3]
Mr Murugiah's employment with Quantum
Mr Murugiah commenced employment with Quantum in April 2011. He signed Quantum's standard terms and conditions of employment on 6 April 2011.
Those terms included a confidentiality provision, in a relatively common form, in the following terms:
You must not at any time during your employment with the Company, or at any time after your employment terminates, other than in the proper course of performing your duties, or as required by law, disclose to any other person, any confidential information or trade secrets concerning the business, affairs, products and property of the Company. During your employment with the Company, you must use your best endeavours to prevent the unauthorised disclosure of such confidential information or trade secrets by a third party.
Upon the termination of your employment you must not take with you, and you must promptly return any confidential information. 'Confidential information' includes, but is not limited to:
(a) information relating to the business, manufacturing methods, processes, techniques, products, engineering, program Company confidential or which may reasonably be understood to be confidential or which is received in confidence from third parties by the Company;
(b) the names, addresses and other details of customers of the Company;
(c) information regarding the needs of customers of the Company;
(d) information regarding the business between the Company and its customers
(e) computer program material, drawings, blueprints or other reproductions, notebooks, documents and reports.
The standard terms and conditions also included a non-solicitation clause in the following terms:
In order to reasonably protect the goodwill of the Company's business and in consideration of the employment, you must not, during the restraint period:
(a) solicit, induce or encourage any employee or agent of the Company to leave the Company; or
(b) approach or accept any approach from any customer of the Company with a view to obtaining the custom of that person in a business which competes with the Company.
'Restraint period' means the period from the date of signing this letter until six months after the date of termination of employment.
By letter dated 28 November 2013, Quantum informed Mr Murugiah that his employment terms and conditions were as set out in the Fair Work Act 2009, Clerk's Private Sector Award 2010 and any other applicable legislation. His classification was level 5.
Mr Murugiah's remuneration was fixed at $XX,XXX plus statutory superannuation. Mr Reddy also said that, in addition to his base salary, Mr Murugiah's terms of employment included a performance incentive program, which consisted of a quarterly bonus if he achieved a percentage margin associated with his key performance indicators.
The new conditions also entitled either party to terminate the employment by providing notice in writing in accordance with the national employment standards or pay forfeited or paid in lieu.
Clause 13.1 of the Clerks - Private Sector Award 2010 had the effect that, as Mr Murugiah had been employed by Quantum for more than 5 years, the notice period was 4 weeks.
Mr Murugiah's role with Quantum was apparently as a business manager. Quantum tendered into evidence a job description dated 6 October 2017 that set out the scope of employment and responsibilities for Quantum's business managers. It is not clear whether the document was given to Mr Murugiah.
Mr Reddy gave evidence that all of Quantum's employees who are located at the Hoxton Park facility report to Mr Murugiah, who managed Quantum's staffing levels and recruitment at that facility.
I will set out the evidence given by Mr Reddy concerning the information acquired by Mr Murugiah, as the defendant submitted that the evidence was insufficient to establish that Mr Murugiah was aware of any confidential information to which Quantum was entitled. Mr Reddy said in his 3 December 2018 affidavit:
24. Mr Murugiah has knowledge of salary and skills of all plaintiffs' employees working at the defendant's Hoxton Park facility. Mr Murugiah is also aware of which employees are performing well and the employees which it would be worthwhile for the defendant to recruit in order to cost effectively provide technical services to third parties.
25. Mr Murugiah also has knowledge of other confidential information regarding the plaintiff's business, including pricing and costing methodology, cost structures, process timings and margins. Mr Murugiah also has knowledge of the plaintiff's customer list, the plaintiff's know-how and methodologies.
Mr Reddy added in his 11 December 2018 affidavit:
17. As stated at paragraphs 24 to 25 of my first affidavit, as a member of the plaintiff's senior management team, Mr Murugiah possesses confidential information that belongs to the plaintiff, including but not limited to recruitment processes, salary reviews, and the company's business projections and overall performance.
18. The senior management team would hold monthly management meetings that would be attended by approximately eight (8) persons, including Mr Murugiah. At these monthly meetings we would table and discuss matters including new business, pipeline offers and tenders, costings of particular projects, the overall performance of the plaintiff, and profit margins of the plaintiff by customer.
19. The usual process for salary reviews for employees of the plaintiff is an annual review either near the end of the financial year, or the end of the calendar year, depending upon the start date of the employee. Team leaders or site managers could also recommend a salary review outside these periods. When a salary review was conducted, the team leader or site manager would make a recommendation that would be reviewed by the human resources manager. A meeting would then be held with human resources manager, the two directors of the plaintiff being myself and Mr Ian Mak, and the relevant site business manager. As Mr Murugiah was the site business manager for the Hoxton Park facility, he was involved in all salary review discussions relating to staff at the Hoxton Park facility.
20. Similarly, the process for recruitment would be for the site business managers and team leaders to work with the human resources manager to interview and recruit staff. This would be done in consultation with myself and Mr Mak. Mr Murugiah was involved in the recruitment of staff at the Hoxton Park facility.
[4]
Additional factual matters
Mr Reddy gave evidence of other occasions involving tenders made by Quantum to Dell and Samsung in respect of which there may have been competition between Quantum and Schenker. Quantum's counsel did not place emphasis on this evidence in his submissions. These matters may have influenced Mr Reddy's decision to request that clause 13.13 be inserted in the Services Agreement.
Mr Reddy also gave evidence that, before Schenker offered employment to Mr Murugiah, Schenker employed another employee of Quantum, Mr Jeffrey Chanko, who had been employed between about 2 May 2018 and 12 October 2018 as a technician at the Hoxton Park facility providing services under the Services Agreement. Mr Chanko received instructions from Schenker's employees on a day-to-day basis regarding services required by Schenker, as well as planning, scheduling and execution of those services.
More significantly, Quantum tendered a copy of an email dated 26 October 2018 from Mr Murugiah to Mr Reddy on the subject of "FXA Phase 2 opportunity". The email said:
Hi Prem,
I had a chat with Andrew today and he confirmed that Schenker will be running the technical operation of FXA phase 2 expansion on their own at Hoxton Park.
He also told me he is hiring staff for this requirement at the moment.
Regards,
Sunther
While this apparently significant communication did not receive elaboration in the evidence, it does appear to provide some evidence that Schenker in fact was seeking staff to undertake work that would otherwise have been done by Quantum under the Services Agreement.
[5]
Mr Murugiah's evidence of his employment with Quantum
Mr Murugiah said that he has had 18 years' experience in managing technical operations in IT and electronics, with over 10 years local experience in people management, process improvements, customer service and supply chain operations.
Mr Murugiah was initially responsible for managing the operations of customs fulfilment services and asset recovery business for Dell based upon a service contract between Dell and Quantum.
From 2013 until November 2017, Mr Murugiah worked on the Dell contract from Schenker's warehouse in Homebush. He commenced to work at Schenker's Hoxton Park facility from November 2017.
Mr Murugiah acknowledged his involvement in the negotiation of the Services Agreement, but said that the involvement was limited to the pricing and rates discussion. Although he had access to the drafts of the agreement, he was not involved in the negotiation of the commercial terms, and did not read clause 13.13.
Mr Murugiah said:
15. From May 2018 I was responsible for the overall supervision of the plaintiff's employees who were performing the services for Fuji Xerox on behalf of the first defendant. I did not perform those services myself. In addition, while I worked at the Hoxton Park facility, there was a productions team leader, Simon Paul, who was employed by the plaintiff and who was responsible for the management of the day-to-day operations for the plaintiff for both the Dell contract and the services provided to Fuji Xerox. He directly supervised the staff on those projects. I understand that Mr Paul has been the team leader performing that role for between five and six years. Mr Paul reported to me.
16. Mr Paul's responsibilities included rostering and allocating staffing resources, training and directly supervising staff on a day-to-day basis. It was only matters when needed to be escalated that i became involved in respect of employees, such as a non-performing employee requiring intervention. Other escalations from Mr Paul included, but were not limited to hiring new staff, pricing enquiries and escalations from clients.
17. The large majority of the plaintiff's employees at the Hoxton Park facility, approximately 90% as far as i can recall, were casual employees. There were approximately 40-50 employees of the plaintiff working at the Hoxton Park facility. As far as I can recall, they were typically individuals on student visas who each work between 20 to 40 hours per fortnight (subject to their visa conditions).
18. The staffing levels of the casual employees would fluctuate as a result of the nature of their engagement and the needs of the plaintiff's business.
Mr Murugiah said that at the time he resigned from his employment with Quantum his annual salary was $XX,XXX plus superannuation.
Mr Murugiah does not appear to have challenged the evidence given by Mr Reddy concerning his involvement in the management of Quantum's business and the information that he acquired as a result of that involvement.
[6]
Termination of employment and offer of employment by Schenker
Mr Murugiah said that he had unsuccessfully applied for other roles with Schenker within the last two years. He had also applied for other positions with different employers at various times during 2018.
In the second half of 2018, Mr Murugiah saw an advertisement for a technical operations manager with Schenker on Seek. He applied for the position on 8 October 2018, and noted that there was no prohibition in his employment contract restricting him from working for Schenker. Mr Murugiah gave as his reason for seeking a change of employment:
30. I decided to apply for the position of technical operations manager as I was looking for a change. I felt I was not getting enough paid enough for the work I was doing for the plaintiff. There had been other matters within the plaintiff's business that had made me look for alternative employment. These matters were that i was unhappy with how Mr Reddy was treating myself and my team. Mr Reddy and I had disagreements about pay for staff, and I was generally unhappy with the level of trust and communication.
Mr Murugiah attended interviews with representatives of Schenker on 17 and 29 October 2018. During the second interview, Mr Murugiah was advised by Schenker's Hoxton Park distribution centre manager that his new role "would be working on the Fuji Xerox and Assurant projects at the Hoxton Park facility. He also indicated that I would need to get training at the Fuji Xerox site at Mascot".
On 5 November 2018, Mr Murugiah was offered employment by Schenker at a gross remuneration package of $XXX,XXX per annum (about $22,000 more than he was being paid by Quantum).
Mr Murugiah said that he was not encouraged or invited by Schenker to seek employment with it, and he did so on his own initiative, after seeing the position advertised on Seek.
Mr Murugiah gave four weeks' written notice of termination of his employment to Quantum on 7 November 2018, indicating that his last day at work would be 5 December 2018.
There is some evidence that Mr Murugiah did not formally accept Schenker's offer of employment until 9 November 2018, although he accepted the offer in principle before that date.
[7]
Offer of continuing employment made by Quantum to Mr Murugiah
On 26 November 2018, Mr Reddy and Mr Mak asked Mr Murugiah to reconsider his resignation. Mr Reddy said that if money was a major concern, then Quantum would be happy to match and better any offer that Mr Murugiah had from Schenker.
Mr Reddy informed Mr Murugiah that the effect of clause 13.13 of the Services Agreement was that both parties were prohibited from recruiting each other's employees. Mr Reddy said that Quantum would consider taking action to stop Schenker from hiring its staff, and that Mr Murugiah's employment with Schenker may be affected if it did so.
Mr Murugiah said that he would need to think it over and consult with his family.
Mr Khanna said that he had a conversation with Mr Murugiah on 7 November 2018, after he received Mr Murugiah's resignation letter. Mr Murugiah at that time was not willing to disclose the name of the company that would employ him. Mr Khanna said that he informed Mr Murugiah that Quantum had an agreement in place with Schenker which forbids Schenker from hiring its staff during the term of the contract and six months after its expiry.
On about 27 November 2018, Mr Khanna telephoned Mr Murugiah, who informed him that he was seeking legal advice. Mr Murugiah asked Mr Khanna to send him a copy of the contract with Schenker. Ultimately, Mr Khanna invited Mr Murugiah to visit Quantum's office to review the contract, but informed Mr Murugiah that he should have a copy of the contract as an attachment to Mr Reddy's email of 15 May 2018. Mr Murugiah told Mr Khanna that he had found the attachment but was not sure whether it was a final version. Mr Murugiah read out clause 13.13 and Mr Khanna confirmed that the clause was in those terms.
Mr Murugiah nonetheless informed Mr Khanna that he had decided to stand by his termination of his employment and to continue with the employment offered to him by Schenker.
[8]
Mr Murugiah's personal circumstances
As a result of the granting of the ex parte interlocutory injunction on 4 December 2018, Mr Murugiah is not presently employed.
Mr Murugiah is the primary breadwinner for his family and he has three children aged 17, 15 and 13 who are dependent on him.
His wife works casually in packaging in a chocolate factory, and the work is erratic. For example, she had not worked for around four months, but had two days' work in the week that Mr Murugiah swore his affidavit on 11 December 2018. Mr Murugiah's family home is mortgaged, and he has responsibilities to pay the mortgage on a monthly basis, together with the running costs of the family including electricity, food, clothes, travel expenses, sports and education expenses.
The family have two motor vehicles because of Mr Murugiah's work, and the children are scattered between three different schools.
Mr Murugiah also provides financial support for his mother who requires substantial medical treatment in Sri Lanka. There is no equivalent of Medicare in Sri Lanka and medical expenses are paid for by individuals.
Mr Murugiah's brother in Sri Lanka is presently not working and is married with two children. Mr Murugiah is assisting him and his family financially during the period.
On 17 November 2018, Mr Murugiah's eldest sister passed away with breast cancer. The sister was a teacher and the primary breadwinner for her family of two children. Mr Murugiah also provides financial support to her family.
Mr Murugiah usually takes a holiday with his family within Australia during the Christmas period, but without an income he will be unable to do that this year.
Mr Murugiah said that he wishes to commence employment with Schenker as soon as possible and is ready to do so.
[9]
Offers made by Quantum and Schenker
Both Quantum and Schenker have made offers evidently intended to affect the court's consideration of the balance of convenience in respect of the grant of the interlocutory injunction sought by Quantum.
In par 27 of his 11 December 2018 affidavit, Mr Reddy said that Quantum remains willing to employ Mr Murugiah on the same terms and conditions as he was previously employed. If Mr Murugiah were to recommence employment with Quantum, he would be placed at the Silverwater facility as a manager at that site. Mr Reddy said this would be a shorter commute from Mr Murugiah's home than his previous commute to the Hoxton Park facility.
At the hearing, Quantum made an open offer of continuing employment of Mr Murugiah in the following terms (Exhibit P 4):
The plaintiff offers permanent employment to the second defendant on the same terms which applied to the second defendant's previous employment by the plaintiff as at 7 November 2018.
In the event that the second defendant accepts the above offer of employment, then at least until the final determination of these proceedings:
(a) the second defendant's place of work will be unit 11, 2 Slough avenue, Silverwater, NSW; and
(b) the plaintiff will not terminate the second defendant's employment in the absence of serious misconduct on the part of the second defendant.
Date: 13 December 2018.
On the other hand, on 10 December 2018, by open letter made by Schenker's solicitors to the solicitors for Quantum, Schenker made an offer to settle the proceedings on terms including the following (Exhibit 1D2):
1. Our client undertakes, on a without admissions basis, that:
(a) until 30 April 2020 or six months after the termination of the services agreement (whichever is earlier), our client will not solicit any of your client's employees who currently work, or who have worked, at our client's business premises at [Hoxton Park] and who have provided services the subject of the services agreement; and
(b) it will not direct Mr Murugiah to provide any confidential information (as that term is defined in Mr Murugiah's employment contract) belonging to your client (if he has any) to our client.
2. Our client can employ Mr Murugiah on and from 6 December 2018 and Mr Chanco on and from 12 November 2018.
[10]
Consideration
The first issue, as stated by McLelland J in Orton v Melman, and accepted by Gleeson JA in Isaac v Dargan Financial Pty Ltd at [61], is whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed.
The defendants in this case did not contend that the proposed employment by Schenker of Mr Murugiah would not constitute a breach of clause 13.13 of the Services Agreement, assuming that provision is valid. Schenker is a party to the agreement, Mr Murugiah was an employee of Quantum at the time of the offer of employment and its acceptance, and the Services Agreement remained on foot at the time.
The second issue is whether the restraint, so far as it applies to that breach, is contrary to public policy. This issue, as I understand it, requires the application of the common law principles in the context of s 4(1) of the Restraints of Trade Act. That is why McLelland J and Gleeson JA expressed the issue in terms of whether the restraint, so far as it applies to the relevant breach, is contrary to public policy. The common law would ask the different question of whether the restraint considered as a whole is contrary to public policy, so that if it is not entirely defensible as being reasonable, it will fail.
Quantum submitted that clause 13.13 was not against public policy in respect of its operation in the context of Schenker's employment of Mr Murugiah, because it went no further than is reasonable to protect the legitimate interests of Quantum; being (a) its confidential information; and (b) its staff connection and the stability of its workforce in the particular context of the Services Agreement.
For the reasons that follow, I am satisfied on the evidence before the Court at this interlocutory stage of the proceedings that Quantum has demonstrated a sufficiently strong case to justify the Court in proceeding to consider the balance of convenience, before it decides whether the existing interlocutory injunction should be continued.
In making this judgment, I have not treated the case as requiring the exceptional approach described by McLelland J in Kolback Securities Pty Ltd v Epoch Mining NL, as I do not consider that the determination of the interlocutory question is sufficiently likely in a practical sense to conclude the issue between the parties to justify that approach. However, as should appear from my consideration of the authorities and the detail of my examination of the evidence, I have treated this case as one that requires the Court to be satisfied that there is more than a bare serious question to be tried. I can be no more explicit than to say that I have satisfied myself that Quantum has a reasonably strongly arguable case, although the present stage of the proceedings is only preliminary, and the Court could not rule out any outcome of the final hearing, after Quantum has been given an opportunity to put its case fully and that case has been strenuously tested.
I will start by making some observations as to what I consider would be the probable outcome of the application of the common law principles governing the effectiveness of restraints of trade to clause 13.13.
At common law, clause 13.13 is prima facie invalid because it is a restraint of trade, even though it is contained in an arm's length agreement negotiated between two substantial commercial corporations. I consider that it is most likely that Quantum will not be able to sustain the burden of proving that clause 13.13 is, in whole, no more than is reasonable to protect the legitimate interests of Quantum, either in respect of Quantum's relationship with Schenker, or in respect of the effect of enforcing the clause on Quantum's present and former employees generally.
Little need be said about that part of clause 13.13 that purports to prohibit Schenker's "associated entities, sub-contractors or their employees" from acting in the manner stated in the clause. The parties did not focus on this aspect of the provision. In-so-far as clause 13.13 purports to impose restraints on non-parties to the Services Agreement, it is likely to be unenforceable for want of privity, irrespective of the principles governing the validity of restraints of trade at common law. There was no suggestion that clause 13.13 should be construed as imposing upon Schenker an obligation to procure the third parties to act in the manner contemplated by the provision, and accordingly nothing more need be said about the matter.
Clause 13.13 is a blanket restraint that applies to all employees or ex-employees of Quantum during the period of the Services Agreement and six months after its termination. While, for understandable reasons, the evidence did not explore the extent to which employees or ex-employees other than Mr Murugiah may have possessed relevant confidential information of Quantum, it is extremely unlikely that all employees and ex-employees would possess such confidential information as to justify the imposition of the restraint.
Further, in the context that four of Quantum's employees, perhaps under the supervision of Mr Paul and the ultimate management of Mr Murugiah, worked at the Hoxton Park facility on the services being provided to FXA under the Services Agreement, with Quantum having about 93 employees at that facility, 200 employees in Australia and about 650 employees in the Asia Pacific region, it is highly likely that clause 13.13 would operate as a mere and impermissible restraint against competition in relation to almost all of the present and ex-employees of Quantum to whom it would literally apply.
That is why, in my view, it is most likely that clause 13.13 would be found to be an invalid restraint of trade at common law.
At a contested hearing of these proceedings, the availability of the relief claimed by Quantum is likely to depend on the application of s 4(1) of the Restraints of Trade Act, and the relief that may be granted is likely to be limited to the prohibition of employment of Mr Murugiah, and perhaps other employees of Quantum who have worked on the provision of services under the Services Agreement. (In saying this, I do not speculate on whether evidence may be available concerning other employees who have Quantum's confidential information, or other employees who provide services to other customers than FXA from the Hoxton Park facility).
So far as the potential application of s 4(1) of the Restraint of Trade Act is concerned, the defendants did not suggest that clause 13.13 was not capable of being applied to the breach alleged, being the employment of Mr Murugiah by Schenker, by an appropriate reading down of the terms of the clause in the sense discussed by the Court of Appeal in the Woolworths case that has been set out above.
I take it to be the applicable principle that, for a restraint of trade that is prima facie invalid at common law to be shown to be valid, the proponent of the restraint must demonstrate that it reasonably protects the proponent's legitimate interests, and if that is demonstrated, it is open to the opponent to establish that the restraint unreasonably damages the public interest. Relevantly, the touchstone is whether the restraint is reasonable to protect a legitimate interest. There are well established categories of interests that are legitimate subjects for protection, including confidential information and customer connection, and also in perhaps a less developed way, workforce stability. As to this latter aspect, I refer in particular to the extract from the judgment of Brereton J (as his Honour then was) in Cactus Imaging Pty Ltd v Glenn Peters that I have set out above. At [55], Brereton J stated: "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".
I do not consider that this statement by Brereton J should be taken as being intended to define the limits within which it will be reasonable for an employer to protect staff connection, or expressed differently, stability of workforce. Brereton J did not in my view purport to limit the extent to which staff connection or stability of workforce may be the subject of reasonable protection to the case that involves parity of reasoning with the protection of customer connection.
The question in each case requires the identification of the legitimate interest, and a consideration of whether the restraint, so far as it applies to the alleged breach, provides reasonable protection for that interest.
Recognising the preliminary nature of the present proceedings, it is necessary to notice the particular features of this case arising out of the nature of the Services Agreement and the commercial objectives of the parties.
First, the Services Agreement is a sub-contract. Initially, Schenker acquired the business of FXA when that company decided to outsource the provision of a range of services. Some of those services fell within the business of Schenker so that it could provide them itself, but certain other technical IT services could not apparently then be provided efficiently by Schenker. It therefore offered the sub-contract to Quantum to further the partnership between the two companies, where the word "partnership" was not intended to operate in its ordinary commercial sense.
While the evidence is not elaborate, it suggests that the objective was to build up the provision of services to FXA in apparently three phases at various times over 2018. The point is that both Quantum and Schenker would be required to establish the workforce and know how necessary to provide the services required by FXA profitably and efficiently to the satisfaction of that company.
While the Services Agreement contemplated cooperation between Quantum and Schenker, it clearly did not contemplate a joint venture, and imposed no obligation on Schenker to have regard to the interests of Quantum, any further than the terms of the Services Agreement may have imposed contractual obligations upon it (which may perhaps have included implied obligations to act in good faith). The effect of clause 1.2 was that Schenker was not obliged to purchase any minimum level of services from Quantum, and clause 13.5 expressly excluded an entitlement by Quantum to exclusivity of supply.
At the hearing, Schenker relied upon the effect of these terms, in support of its case, by saying that the Services Agreement did not in any event ultimately entitle Quantum to any particular reward at all from the implementation of the agreement. In my view there is at least a good argument that, contrary to this submission, the fact that the Services Agreement clearly contemplated that Quantum would cooperate with Schenker to build up from scratch a profitable business providing the outsourced services required by FXA, without Quantum having the benefit of any fiduciary or contractual assurances that Schenker would act in its interests, may provide the necessary justification for clause 13.13 being given an appropriately limited effect by way of preserving the integrity of Quantum's workforce for the period of the Services Agreement and for a short time thereafter.
The point is that Schenker sub-contracted to Quantum the provision of aspects of the services required by FXA that Schenker could not at the outset supply itself, on the basis that the parties would cooperate and develop in stages the capacity to profitably supply those services, and the benefit of the Services Agreement to Quantum could be usurped by Schenker at any time, by securing the employment of the persons employed by Quantum to provide the sub-contracted services, after Quantum had taken the risk and gone to the trouble of developing the commercial capacity to satisfy FXA's needs by the development of its workforce.
I do not consider that the effect of the enforcement of clause 13.13 in that context would be to enforce a mere restraint on competition, or a restraint that did nothing more than to preserve Quantum's workforce as if its employees were in effect the property of Quantum. In the absence of any fiduciary obligation requiring Schenker to have regard to Quantum's interests as well as its own, because the parties did not intend to establish a joint venture, and in the absence of any contractual obligation on Schenker's part to provide any agreed minimum level of business to Quantum, or to obtain the sub-contract services exclusively from Quantum, it is difficult to see how Quantum could sensibly protect its legitimate commercial position except by some restraint on Schenker's entitlement to take Quantum's employees into its employment, at least in so-far-as those employees materially participated in the provision of the sub-contract services.
In practical terms, the risk to Quantum's commercial position was enhanced by the fact that its employees providing the services under the sub-contract worked from Schenker's premises, so that they would naturally be in easy communication with Schenker, who would be in a position to observe the implementation of the Services Agreement by Quantum, and form relationships with Quantum's employees.
At this stage of the proceedings, I consider Quantum to have a sufficiently arguable case that its legitimate commercial interests, and the reasonableness of the protection of those interests by clause 13.13, should not be considered to involve a mere impediment to competition, in isolation from its context as one provision within the Services Agreement, to justify the conclusion that Quantum has a sufficiently arguable case that it is entitled on a final hearing to the relief sought in prayers 5 and 6 of the further amended summons. This is to recognise the possibility that, at least in relation to the employment by Schenker of Mr Murugiah, clause 13.13 may be reasonably necessary to protect the enjoyment by Quantum of the rights and commercial opportunities that it was intended to gain under the Services Agreement.
The strength of Quantum's case is also enhanced by its reliance upon the information known to Mr Murugiah about the implementation of the Services Agreement that would have been confidential to Quantum.
I have set out the evidence on the nature of the confidential information known to Mr Murugiah above. It must be acknowledged that the information was described in relatively general terms. I do not consider that it would have been realistic for Quantum at an interlocutory stage and in the limited time available to have set out the content of all of the relevant confidential information in any real detail. As Mr Murugiah was the manager who had overall supervision of the implementation of the sub-contract, the hiring of the necessary employees, and the establishment and refinement of the scope of works, together with his participation in what I take to be frequent high level management meetings conducted orally (at least in part) by Quantum, there is in my view a high probability that Mr Murugiah does have significant confidential information concerning how Quantum effectively provides the sub-contract services, and also that the time available was insufficient to render all of the necessary evidence into writing in detail.
Suffice it to say, in my view Quantum has a reasonably strongly arguable case that, at least in relation to Mr Murugiah, the enforcement of clause 13.13 would be no more than a reasonable protection of its confidential information.
This conclusion is reinforced by the evidence, albeit that it is scant, that Schenker intends to provide the later phases of the subcontract services to FXA itself. Mr Murugiah gave evidence that he was told by a representative of Schenker that he would work on Schenker's contract with FXA. If he did so, it would be hard for him to put out of mind all of his knowledge of how Quantum had successfully gone about providing services to FXA on a sub-contract basis.
At this interlocutory stage of the proceedings, it is not necessary to make any final findings of fact or to determine how the relevant principles of law will ultimately be applied, but I am satisfied that, in the particular circumstances of this case, and in relation to how it applies solely to Mr Murugiah, Quantum has established a sufficiently strong case that it will obtain the relief sought to justify the Court to proceed to consider the balance of convenience.
In reaching this conclusion, I have not ignored the significance of the principle that a restraint in a contract between commercial interests that may appear to be reasonable as between the parties may nonetheless be found to be invalid because of the manner in which it impinges upon the freedom of one of the parties' employees.
As has been set out above, Mr Murugiah's employment agreement contained a restraint against the misuse of confidential information. Even at an interlocutory stage, there is no positive evidence that Mr Murugiah would misuse the confidential information of which he has knowledge. Nonetheless, in the particular context that he would be employed by Schenker, as Quantum's counterparty to the Services Agreement, and as the evidence suggests that he would be employed to provide services for FXA, where there is a risk that Schenker may avail itself of its contractual right to provide the sub-contract services itself, there is in context a legitimate basis for concern that Mr Murugiah may not be able to avoid misusing the confidential information known to him, even if he does not positively disclose it to Schenker.
Mr Murugiah's employment agreement does not contain any restraint on Mr Murugiah taking employment with any competitor of Quantum. The consequence is that Mr Murugiah would be able to accept employment from any employer, whether or not a competitor of Quantum, except for Schenker during the period of the Services Agreement and for a short period thereafter.
At this interlocutory stage of the proceedings, it would not be proper in my view for the Court to hold that the limited restraint on the availability of employment to Mr Murugiah is so likely to deny any validity to clause 13.13 to justify a refusal by the Court to continue the interlocutory injunction against Schenker.
I consider that the balance of convenience in this case warrants the continuation of the interlocutory injunction in terms of prayer 3 of the amended summons, but only on the condition that Quantum implement, and continues to implement, the offer that it has made to Mr Murugiah that has been set out above, and is contained in Exhibit P4.
First, I consider that if the interlocutory injunction is not continued but Quantum ultimately succeeds in establishing its claim, the absence of the interlocutory injunction will substantially deprive Quantum of the benefit of clause 13.13 in relation to Mr Murugiah.
I am reinforced in this view in relation to the balance of convenience by the consideration that, in relatively finely balanced cases, there is a positive benefit in holding commercial parties to their bargains. I understand that care must be taken where the relevant aspect of the bargain is prima facie invalid at common law, but for the reasons that I have explained above, this is a relatively special case where the clause was not part of the 'boilerplate', but was specifically agreed in circumstances where, at least in part, the need for the protection provided by the provision can be justified because of the special circumstances of the sub-contract and Quantum's vulnerable commercial position.
Secondly, if the interlocutory injunction is not continued, it may not be practically feasible for Quantum to demonstrate, after the event, that its confidential information has been wrongly used against its interests, or that the fact of Mr Murugiah's employment by Schenker has materially improved Schenker's ability to provide to FXA the services that are presently provided by Quantum under the sub-contract. I am satisfied that damages is unlikely to be an adequate remedy for Quantum.
Thirdly, Schenker did not suggest, and did not put forward any evidence to establish, that if it was deprived of the opportunity to employ Mr Murugiah until final judgment in these proceedings it would suffer any significant loss.
So far as Mr Murugiah's position is concerned, on the evidence presently available, it is unlikely that it will be proved at any final hearing that he became aware of the terms of clause 13.13 at the time of his involvement in the negotiation of the terms of the Services Agreement.
It is clear that Mr Murugiah was not solicited by Schenker in any direct sense, and Mr Murugiah was given his initial interview as a result of an invitation made by Schenker publicly on Seek.
It cannot be known, however, at this stage whether Schenker was influenced to offer employment to Mr Murugiah because of its knowledge of his role in the provision of the sub-contract services by Quantum to FXA.
The most that is likely to be established is that Mr Murugiah may have been specifically informed of the effect of clause 13.13 after Schenker made its offer of employment to him, but before he formally accepted it. That is not a question to be decided at this time.
Although Mr Murugiah should not be criticised for making the choice that he did, he did choose to confirm the termination of his employment by Quantum and accepted the employment offered by Schenker with his eyes open. If the Court continues the interlocutory injunction, there is a risk that Mr Murugiah will lose the opportunity of being employed by Schenker. However, if the injunction were not continued, Schenker would not be able to continue to employee Mr Murugiah if Quantum succeeded in establishing its right to an injunction to enforce the restraint at a final hearing. The possibility that Mr Murugiah will lose the opportunity to be employed by Schenker is in this sense neutral, and is a matter of timing, because it depends upon who ultimately succeeds in the proceedings.
Quantum offered to employ Mr Murugiah on terms that met those offered by Schenker, before Mr Murugiah's employment by Quantum formally terminated, but Mr Murugiah, apparently on legal advice, rejected that offer. That is a factor that would weigh in favour of the Court continuing the interlocutory injunction, but would not have been sufficient if Quantum had not made the offer contained in Exhibit P4.
Although acceptance of that offer, at least until the completion of these proceedings, is not Mr Murugiah's preferred future, the offer does in my view go a very long way to remedying the inconvenience that Mr Murugiah will suffer as a result of the continuation of the interlocutory injunction. That is particularly so, as the continuing effect of the injunction will be made conditional upon Quantum continuing to honour the offer, if it is taken up by Mr Murugiah, and doing so in accordance with its proper spirit.
I have not ignored the significance of the open offer made by Schenker to settle these proceedings. The terms of that offer do have a material effect on the balance of convenience, although not in my view as significant as the terms of the offer made by Quantum. Paragraph 1(a) would protect Quantum in-so-far as it would prevent Schenker employing any further employees of Quantum who had provided services the subject of the Services Agreement (in addition to Mr Murugiah and Mr Chanko). The prohibition in par 1(b) would restrict Schenker from directing Mr Murugiah to divulge Quantum's confidential information to it, but it could not of course limit the use of that information by Mr Murugiah during the course of his employment by Schenker in the provision of services to FXA. Schenker's offer would be effective to limit the potential damage to Quantum if its conduct is ultimately found to be a breach of clause 13.13, but it will not entirely exclude the possibility that practically unprovable damage will occur.
There was not, as I understand it, any evidence as to whether Mr Murugiah will finally lose the opportunity of employment by Schenker, if the injunction is continued on an interlocutory basis, but a final injunction is not made following the hearing. There is no basis for the Court to speculate on this issue, although it is not unfair to observe, given the strength of Schenker's opposition to Quantum's interlocutory application, that it would be somewhat invidious for Schenker not to find a place for Mr Murugiah, if its defence succeeds, but Quantum does not continue his employment.
[11]
Orders
For the reasons given above, I propose to make the following order. It is implied in Quantum's submissions that it will give the usual undertaking as to damages, but I will require Quantum's legal representative to re-state the usual undertaking before I make the order. That order will be:
1. Upon the plaintiff by its counsel giving the usual undertaking as to damages, and subject to the condition that the plaintiff implements and continues in a bona fide way to implement the offer made by the plaintiff to the second defendant in Exhibit P4, the Court orders that the first defendant be restrained, until the final determination of these proceedings or the further order of the Court, from employing the second defendant.
I am inclined to think that, given that contractual terms of the nature of clause 13.13 are prima facie invalid, the nature of the parties and the factual context of the dispute, the fact that the continuation of the interlocutory injunction impinges on the freedom of employment of Mr Murugiah, and most importantly that the outcome of the interlocutory dispute was relatively finely balanced, that the appropriate order for costs is that the costs of the interlocutory application be each party's costs in the cause. However, I will hear any party who wishes to contend that a different order for costs should be made. I will invite the parties to provide to my Associate agreed short minutes of order to deal with the issue of costs, but if they cannot agree the matter may be re-listed for oral argument at a convenient time by arrangement with my Associate.
[12]
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Decision last updated: 11 January 2019
Principles applicable to interlocutory application in this case
I respectfully accept that the approach that this Court should take to the determination of a contested application for the continuation of an injunction on an interlocutory basis is as stated by Gummow and Hayne JJ in Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; [2006] HCA 46, as follows (footnotes omitted):
[65] The relevant principles in Australia are those explained in Beecham Group Ltd v Bristol Laboratories Pty Ltd. This court (Kitto, Taylor, Menzies and Owen JJ) said that on such applications the court addresses itself to two main inquiries, and continued:
The first is whether the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief … The second inquiry is … whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted.
By using the phrase "prima facie case", their Honours did not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed; it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial. That this was the sense in which the court was referring to the notion of a prima facie case is apparent from an observation to that effect made by Kitto J in the course of argument. With reference to the first inquiry, the court continued, in a statement of central importance for this appeal:
How strong the probability needs to be depends, no doubt, upon the nature of the rights [the plaintiff] asserts and the practical consequences likely to flow from the order he seeks.
…
[67] Various views have been expressed and assumptions made respecting the relationship between the judgment of this court in Beecham and the speech of Lord Diplock in the subsequent decision, American Cyanamid Co v Ethicon Ltd. It should be noted that both were cases of patent infringement and the outcome on each appeal was the grant of an interlocutory injunction to restrain infringement. Each of the judgments appealed from had placed too high the bar for the obtaining of interlocutory injunctive relief.
…
[70] When Beecham and American Cyanamid are read with an understanding of the issues for determination and an appreciation of the similarity in outcome, much of the assumed disparity in principle between them loses its force. There is then no objection to the use of the phrase "serious question" if it is understood as conveying the notion that the seriousness of the question, like the strength of the probability referred to in Beecham, depends upon the considerations emphasised in Beecham.
[71] However, a difference between this court in Beecham and the House of Lords in American Cyanamid lies in the apparent statement by Lord Diplock that, provided the court is satisfied that the plaintiff's claim is not frivolous or vexatious, then there will be a serious question to be tried and this will be sufficient. The critical statement by his Lordship is "[t]he court no doubt must be satisfied that the claim is not frivolous or vexatious, in other words, that there is a serious question to be tried". That was followed by a proposition which appears to reverse matters of onus:
So unless the material available to the court at the hearing of the application for an interlocutory injunction fails to disclose that the plaintiff has any real prospect of succeeding in his claim for a permanent injunction at the trial, the court should go on to consider whether the balance of convenience lies in favour of granting or refusing the interlocutory relief that is sought. [Emphasis added]
Those statements do not accord with the doctrine in this court as established by Beecham and should not be followed. They obscure the governing consideration that the requisite strength of the probability of ultimate success depends upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought.
[72] The second of these matters, the reference to practical consequences, is illustrated by the particular considerations which arise where the grant or refusal of an interlocutory injunction in effect would dispose of the action finally in favour of whichever party succeeded on that application. The first consideration mentioned in Beecham, the nature of the rights asserted by the plaintiff, redirects attention to the present appeal.
In the present case, both defendants relied upon the special considerations (referred to at [72] of the above extract from the judgment of Gummow and Hayne JJ) that may apply in a case where the outcome of the interlocutory application may have the practical effect of finally determining the rights of the parties, as was considered by McLelland J (as his Honour then was) in Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533.
First, it will be appropriate to note the observations made by his Honour concerning the proper approach for the Court to take in the ordinary case where the outcome of the application will only subsist until the later final determination of the proceedings after a contested hearing. His Honour said at 535:
There was some discussion in argument as to the proper approach of the Court to an application for an interlocutory injunction in circumstances such as the present.
As I see it, the position is as follows. Where a plaintiff's entitlement to ultimate relief is uncertain, the Court, in deciding to grant or refuse an interlocutory injunction, must consider what course is best calculated to achieve justice between the parties in the circumstances of the particular case, pending the resolution of the uncertainty, bearing in mind the consequences to the defendant of the grant of an injunction in support of relief to which the plaintiff may ultimately be held not to be entitled, and the consequences to the plaintiff of the refusal of an injunction in support of relief to which the plaintiff may ultimately be held to be entitled: see, eg, Appleton Papers Inc v Tomasetti Paper Pty Ltd [1983] 3 NSWLR 208 at 216; A v Hayden (No 1) (1984) 59 ALJR 1 at 4-5; 56 ALR 73 at 79. Where the uncertainty depends in whole or in part on a contested question of fact it is not appropriate for the Court to decide that question on the interlocutory application. Where the uncertainty depends in whole or in part on a contested question of law, it may or may not be appropriate for the Court to decide that question on the interlocutory application, depending on circumstances, eg, whether the question is novel or difficult, or is susceptible of resolution on the present state of the evidence, or whether the urgency of the matter renders it impracticable to give proper consideration to the question: see, eg, A v Hayden (No 1) (at 4; 78); Cohen v Peko-Wallsend (1986) 61 ALJR 57 at 59; 68 ALR 394 at 397. If the Court does decide the question of law the uncertainty is to that extent removed.
Unless the plaintiff shows that there is at least a serious question to be tried which if resolved in its favour would entitle it to final relief, then the requirements of justice as between the parties will dictate that an interlocutory injunction should be refused: Australian Coarse Grain Pool Pty Ltd v Barley Marketing Board of Queensland (1982) 57 ALJR 425; 46 ALR 398; Tableland Peanuts Pty Ltd v Peanut Marketing Board (1984) 58 ALJR 283; 52 ALR 651; A v Hayden (No 1); Castlemaine-Tooheys Ltd v South Australia (1986) 60 ALJR 679; 67 ALR 553 and Cohen v Peko-Wallsend Ltd.
The notable aspect of these observations is that it is not generally appropriate for the Court to decide contested questions of fact on an interlocutory application, and there are many circumstances in which it will not be appropriate for the Court to decide contested questions of law.
The defendants relied in the present case on the following special considerations raised by McLelland at 536:
Apart from this, although normally the Court "does not undertake a preliminary trial, and give or withhold interlocutory relief upon a forecast as to the ultimate result of the case" (Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622), there are some kinds of case in which for the purpose of seeing where lies the balance of convenience (or more specifically "the balance of the risk of doing an injustice" - see per May LJ in Cayne v Global Natural Resources plc [1984] 1 All ER 225 at 237, cf per Brennan J in Brayson Motors Pty Ltd v Federal Commissioner of Taxation (1983) 57 ALJR 288 at 292; 46 ALR 279 at 285), it is desirable for the Court to evaluate the strength of the plaintiff's case for final relief: see, eg, Brayson Motors Pty Ltd v Federal Commissioner of Taxation (at 292; 285); Castlemaine-Tooheys Ltd v South Australia at 682; 559. One class of case to which this applies is where the decision to grant or refuse an interlocutory injunction will in a practical sense determine the substance of the matter in issue: see, eg, NWL Ltd v Woods [1979] 1 WLR 1294 at 1306-1307; [1979] 3 All ER 614 at 625-626 per Lord Diplock; Cayne v Global Natural Resources plc. The present is such a case. The substantial matter in issue is whether Epoch should be permitted to proceed with the issue of non-renounceable rights in accordance with the announcement of 13 March 1987. That will be irrevocably determined in a practical sense by the grant or refusal of an interlocutory injunction.
It must be noted that, when his Honour said that the issue "will be irrevocably determined in a practical sense by the grant or refusal of an interlocutory injunction", he was speaking literally in the sense that the plaintiff had sought an interlocutory injunction to restrain the defendant from dispatching to its shareholders an offer to take up new shares on the terms of an announcement made by the directors on 13 March 1987. The closing date for receipt of acceptances of the offer was 24 April 1987. The proceedings were heard in the period 25 to 27 March and judgment was delivered on 1 April 1987. It was entirely plain that a final hearing of the claim could not take place and judgment be given by the date fixed in the resolution made by the directors for the receipt of acceptances.
Of course, the constraints imposed on the time needed to finally determine proceedings, which arise out of the need for the parties to have time to properly prepare their cases, from the pressure of the Court's business, and the limited times that are available to set urgent matters down for hearing, and the time that judges may be required to reserve their judgments in order to give proper consideration to the issues, will often have the result that a consideration of the likelihood that the interlocutory judgment will in practical terms finally determine the rights of the parties will present a relative and indeterminate issue. There will be occasions when it is reasonably obvious that the interlocutory determination is likely to be final in a practical sense, but in other cases the outcome will not be clear.
There have been cases where judges of this Court have mentioned the exceptional aspect of Kolback Securities Ltd v Epoch Mining NL where interlocutory injunctions were sought to enforce restrictive covenants that involved restrictions on employment. In Harlow Property Consultants Pty Ltd v Byford [2005] NSWSC 658, a case where an application was made for an interlocutory injunction against a former employee who was a junior sales representative in a real estate agency, White J (as his Honour then was) noted at [15] that although the claim was for an interlocutory injunction, the period of the restraint was only for six months so that "the grant or refusal of an interlocutory injunction may substantially resolve finally the relief to which the plaintiff is entitled". His Honour said that it was relevant to assess the strength of the plaintiff's case, referring to Kolback Securities Ltd v Epoch Mining NL at 536.
Coincidentally, the period of the restraint considered by McDougall J in Pryse v Clark [2017] NSWSC 185 before which the defendants in that case, who had formerly been partners in the legal firm constituted by the plaintiffs, could become members of a new legal firm that would compete with the plaintiffs was six months. McDougall J at [42] observed that the case before him was one where the assessment of where the balance of convenience lies "will require the court to make some assessment beyond the 'prima facie' test, of the strength of the plaintiff's case". His Honour also cited the judgment of McLelland J. McDougall J analysed at [43] and [44] the alternatives that would be available within the six-month period if he were to grant the interlocutory injunction sought by the plaintiffs, and concluded: "the Kolback issue is important in the present case".
As will be seen below, in the present case the relevant term of the Services Agreement, clause 13.13, would if enforced prevent Schenker from employing Mr Murugiah for a minimum period of six months following the termination of the agreement. By clause 2.1, the expiration date of the Services Agreement is 30 April 2020 (if it is not extended under clause 2.4). If effective, the period of the restraint will be to 31 October 2020. That will be about 22 months after the date when this judgment will be delivered.
As I understand the defendants' submissions, they sought primarily to rely upon the Kolback Securities principle in two ways. One was that they urged the Court to engage with the legal principles that govern the circumstances in which the Court will enforce a restraint of trade in an agreement between potential commercial competitors that will have the effect of preventing one employing a former employee of the other, and to be prepared to make an essentially final decision about how those principles would apply to the apparent facts of the present case. The second, more specific, submission was to urge on the Court that Quantum had not in the present case placed adequately detailed evidence before the Court as to the true nature of any confidential information that Mr Murugiah may have gained during the course of his employment, and as to how the potential injury to the legitimate interests of Quantum could arise from Mr Murugiah's employment by Schenker, so as to justify an order absolutely preventing Schenker from employing Mr Murugiah during the term of the restraint.
In Willis Australia Group Services Pty Ltd v Griggs [2012] NSWSC 659, Ward J (as her Honour then was) noted at [46] the submission made on behalf of the defendants concerning the evaluation of the strength of the plaintiffs' case, in reliance upon Kolback Securities Ltd v Epoch Mining NL and Australian Broadcasting Corporation the O'Neill at [72] (which is extracted above from the judgment of Gummow and Hayne JJ), but made the following observation:
[47] Such an approach is recognised as appropriate in a case where the effect of the interlocutory decision will in a practical sense determine the substance of the matter in issue. (In this regard, it is by no means clear to me that a grant of interlocutory relief in this matter, whether as sought or one that is more limited in compass, would be likely effectively to provide final relief. There is ample time between now and February/March 2013 for the determination of the final hearing. In that regard, if injunctive relief were granted on an interlocutory basis then the plaintiffs accepted that it would be incumbent on them to co-operate in the matter proceeding to an expedited hearing; the defendants seek an urgent final hearing in any event.)
In the circumstances of the present case, I have concluded that the observations made by Ward J are more apt than the exceptional approach that the Court may be inclined to adopt where it is sufficiently clear, as a practical matter, that there is a real likelihood that the outcome of the interlocutory application will determine the final rights of the parties. Of course, the issue is a fluid one in the sense that there will often not be a bright line between the circumstances that will be finally determined by the interlocutory judgment and those that will not. The Court cannot realistically calibrate its preparedness to assess the strength of a plaintiff's case to the expectation of when the Court will be able to determine the case on a final basis, as this would often involve pure speculation. However, each case will depend upon its own facts, and as the issue is ultimately within the discretion of the Court, the trial judge may decide that some deeper consideration should be given to the plaintiff's ultimate prospects of success than would be required by the usual principles governing the determination of applications for interlocutory relief.
In my view, it is also necessary for the Court to bear in mind its own injunction that claimants for interlocutory relief are required to act with real expedition, and that the need for plaintiffs to make their interlocutory claims will often significantly inhibit the plaintiff's ability to collect and put before the Court evidence in the detail that would approximate the standard of evidence necessary to prove the plaintiff's case at a final hearing.
The consequences of delay by the plaintiff in instituting proceedings for interlocutory relief were significant in Willis Australia Group Services Pty Ltd v Griggs, and Ward J made the following observation:
[144] Mr Moses emphasised that Young J (as his Honour then was) observed in Network Ten Ltd v Fullwood (1995) 62 IR 43 at 46 that:
Finally, the Court expects in cases of interlocutory injunction that people will act promptly. As I sit here in this duty list, if a person has let a week go by it is only in a very strong case that I can be persuaded to grant an injunction or grant short service because if a person is to seek an injunction it should be sought promptly.
and said, further, at p 47 that:
However, there is a separate principle that on an interlocutory injunction the Court in its discretion will refuse the injunction if there has been delay which is not adequately explained. I do not consider that the delay has been adequately explained in this case.
It may be that many judges are now slightly more forgiving than was Young J, but it remains the case that applicants for interlocutory relief are required to make their claims quickly, and are not entitled to delay unduly in order to perfect their evidence, even on an interlocutory basis. That principle is recognised in the general rule that the plaintiff only has to establish that it has a serious question to be tried, or a prima facie case in the sense explained by Gummow and Hayne JJ in Australian Broadcasting Corporation v O'Neill. Plaintiffs may often be placed on the horns of a dilemma as to whether they will suffer if they delay making an interlocutory application in order to improve the strength of their evidence, because if they do, they may suffer as a result of the delay, but if they do not their evidence may be adjudged to be inadequate. A plaintiff who seeks the interlocutory enforcement of any claim to which the exceptional principle in Kolback Securities Ltd v Epoch Mining NL applies may be at particular risk, if the need for expedition causes them to make their application when their evidence is hoped to be sufficient to establish a serious question to be tried, but then because of the practical finality of the interlocutory outcome their claim is determined on the strength of the evidence.
This factor is of some importance in the present case because, in the manner that I have described above, Quantum has acted with considerable expedition, and has done so in order to bring its application for an interlocutory injunction before the Court in the limited time available, and in order to enable the summons to be returned on the day when Mr Murugiah was due to commence his employment by Schenker. The need for expedition may have had a practical consequence in limiting the detail of the evidence that Quantum could be expected to put before the Court concerning the precise nature of the confidential information to which Mr Murugiah had access, and the consequences of his having that confidential information while in the employment of Schenker. I will return to this question after I have considered the relevant evidence.
General principles governing enforcement of restraint of trade provisions
In this State the general principles governing the enforcement of restraint of trade provisions have recently authoritatively been collected by Gleeson JA, with whom Bathurst CJ and Beazley P agreed, in Isaac v Dargan Financial Pty Ltd ATF The Dargan Financial Discretionary Trust (ABN 68 702 047 521) (trading under the name of Home Loan Experts) [2018] NSWCA 163. I respectfully limit my extract from his Honour's observations to those that are most material to the present application, as follows:
[59] At common law a restraint of trade is contrary to public policy and void unless justified by the special circumstances of the particular case. A restraint may be enforced if the restraint is reasonably necessary for the protection of the parties concerned and reasonable in the interests of the public: Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535at 565 (Lord Macnaghten); Lindner v Murdock's Garage (1950) 83 CLR 628; [1950] HCA 48 at 633 (Latham CJ); Buckley v Tutty (1971) 125 CLR 353; [1971] HCA 71 at 376, 379-380.
[60] In New South Wales, it is necessary to have regard to the Restraints of Trade Act 1976 (NSW) which relevantly provides in s 4:
4. Extent to which restraint of trade valid
(1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not.
(2) Subsection (1) does not affect the invalidity of a restraint of trade by reason of any matter other than public policy.
(3) Where, on application by a person subject to the restraint, it appears to the Supreme Court that a restraint of trade is, as regards its application to the applicant, against public policy to any extent by reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint, the Court, having regard to the circumstances in which the restraint was created, may, on such terms as the Court thinks fit, order that the restraint be, as regards its application to the applicant, altogether invalid or valid to such extent only (not exceeding the extent to which the restraint is not against public policy) as the Court thinks fit and any such order shall, notwithstanding subsection (1), have effect on and from such date (not being a date earlier than the date on which the order was made) as is specified in the order.
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[61] The correct approach to the application of s 4(1) of the Restraints of Trade Act is well settled. In Orton v Melman [1981] 1 NSWLR 583 at 587 McLelland J (as his Honour then was) explained that 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 contrary to public policy. If it is not, the restraint is valid, subject to any order which may be made under s 4(3). These principles have been approved in later cases including in this Court: Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317at 328; Woolworths Limited v Olson [2004] NSWCA 372 at [42]-[44]; Jardin and Jardin Investments Pty Ltd v Metcash Ltd and Metcash Trading Ltd [2011] NSWCA 409 at [87].
[62] The effect of s 4(1) of the Restraints of Trade Act is to require, for the purpose of determining the validity of a restraint, that attention be focussed on the actual or apprehended breach, rather than on imaginary or potential breaches: Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9; [2006] NSWSC 717 at [10] (Brereton J).
[63] The validity of a covenant in restraint of trade is to be judged at the date of its creation: Lindner v Murdock's Garage at 653 (Kitto J); Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288; [1973] HCA 40 at 318 (Gibbs J); Geraghty v Minter (1979) 142 CLR 177; [1979] HCA 42 at 181 (Barwick CJ). Nonetheless, the Court may take into account future events that could have been foreseen: Lindner v Murdock's Garage at 653. Hence, when exercising its discretion whether or not to grant relief, the Court considers matters as at the date of the hearing: Sidameneo (No 456) Pty Ltd v Alexander [2011] NSWCA 418 at [70] (Young JA, Beazley and Basten JJA agreeing); Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852 at [88]; (2008) 175 IR 414 at 440 (Brereton J).
[64] The nature of the interest meriting protection under a covenant in restraint of trade will differ according to the type of restraint under consideration. In Tullett Prebon (Australia) Pty Ltd v Purcell, a case involving restraints in an employment case, Brereton J said at [47]:
Whether a restraint is reasonable having regard to the interests of the parties depends on two, albeit related, considerations: first, whether the covenantee has a legitimate protectable interest, and secondly, whether the restraint is no more than reasonable for the legitimate protection of that interest. A covenantee is not entitled to be protected against mere competition; the legitimate interests which may be the subject of protection by covenant are in the nature of proprietary subject matter [Vandervell Products Ltd v McLeo [1957] RPC 185; Tank Lining Corporation v Dunlop Industries Ltd (1982) 40 OR (2d) 219; 140 DLR (3d) 659 at 664], including trade secrets and confidential information, and goodwill including customer connection.
[65] However as Young JA explained in Sidameneo (No 456) Pty Ltd v Alexander at [31]-[32], the word "proprietary" is used in a special sense and will include legitimate commercial interests. In this regard, his Honour referred to the view he had expressed in Twenty‐First Australia Inc v Shade (Supreme Court (NSW), Young J, 31 July 1998, unrep) and Stokely‐Van Camp Inc v New Generation Beverages Pty Ltd (1998) 44 NSWLR 607at 612-613.
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[67] Generally, a stricter and less favourable view is taken of covenants in restraint of trade between employer and employee than in commercial agreements. As Mason P explained in Woolworths Ltd v Olson at [38]:
The courts in general take a stricter and less favourable view of covenants in restraint of trade entered into between employer and employee than of similar covenants in commercial agreements (Geraghty v Minter (1979) 142 CLR 177at 185). The reasons are explained in J D Heydon, The Restraint of Trade Doctrine (2nd ed., 1999) at pp 68-69. It is nevertheless well established that an employer may have interests capable of protection by a restraint covenant. These interests go beyond protection of goodwill and retention of customers and extend to trade secrets …
[68] The same point is made by JD Heydon in the most recent edition of The Restraint of Trade Doctrine (4th ed, 2018, LexisNexis Butterworths) at 96-97, where four main reasons are given for the Court's approach in employment cases. First, the inequality of bargaining power between the parties. Second, the employee may be giving up that employee's only asset, which depends on specialised training and which may not be at all negotiable. Third, when labour is hired it remains valuable whether or not the employee later competes. Fourth, once the employee accepts the post‐employment restraints, the employer's power during the contract is much increased by reason of the inhibition on the employee's ability to threaten to leave and seek work elsewhere.
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[72] In Bridge v Deacons [1984] 1 AC 705, doubt was expressed as to whether the legitimate interests can be necessarily ascertained by placing the relevant agreement in a particular category and then trying to align that category with existing cases, such as employment cases or sale of business agreements. Bridge v Deacons involved a restraint clause in a partnership agreement. Lord Fraser, delivering judgment of the Privy Council on behalf of the other Lordships, observed at 714 that:
The agreement in the present case, being one between partners, does not conform exactly to either of the types to which reference has just been made, although it had some resemblance to both. Their Lordships are of the opinion that a decision on whether the restrictions in this agreement are enforceable or not cannot be reached by attempting to place the agreement in any particular category, or by seeking for the category to which it is most closely analogous. The proper approach is that adopted by Lord Reid in the Esso Petroleum case [1968] AC 269, where he said, at p 301:
I think it better to ascertain what were the legitimate interests of the appellants which they were entitled to protect and then to see whether these restraints were more than adequate for that purpose.
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Onus of proof
[75] One further matter should be mentioned. A question arises as to whether s 4(1) of the Restraints of Trade Act changes the onus of proof of unreasonableness at common law. The parties did not refer to s 4(1) before the primary judge, nor in their written submissions on appeal. Mr Isaac provided supplementary submissions, by leave, after the conclusion of the hearing on this issue. Mr Isaac submitted that s 4(1) of the Restraints of Trade Act 1976 (NSW) did not alter the position at common law. Dargan did not advance any submissions to the contrary.
[76] In Idameneo (No 123) Pty Ltd v Angel‐Honnibal [2002] NSWSC 1214 Palmer J expressed the view that s 4(1) did not alter the common law position. His Honour remarked at [45]-[48]:
45 In Herbert Morris Ltd v Saxelby [1916] 1 AC 688, it was held by Lord Atkinson (at 700) and by Lord Parker (at 707-8) that the onus of establishing that the restraint is reasonable as between the parties lies on the person seeking to enforce the restraint, while the onus of establishing that the restraint is contrary to the public interest lies on the person seeking to invalidate the restraint. That proposition has been widely accepted although it has been observed that the reason for apportioning onus in this way is somewhat obscure: see per Lord Hodson in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269, at 319E. The proposition seems to have been accepted without the necessity for comment by the High Court in Buckley v Tutty at 337
46 These cases, however, were concerned with common law principles, unaffected by statute. In New South Wales, whether or not a restraint of trade is valid in any particular case is now determined by reference to the common law principles as modified by the operation of s 4(1) of the Restraints of Trade Act, 1976 (NSW). That subsection is in the following terms:
…
48 Other than to enable the Court to "read down" the restraint of trade covenant to the particular breach alleged, s 4(1) adds nothing to the common law rules as to the validity of a restraint of trade clause. In particular, the section says nothing about who is to bear the onus of establishing reasonableness as between the parties and as to whether the restraint is in the public interest. I can see no reason why the apportionment of the onus of proof on these two issues, as laid down in Herbert Morris Ltd v Saxelby, should be regarded as altered in any way by the Restraints of Trade Act. This seems to have been accepted by the majority of the Full Court in Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157, at 181, where the majority acted on a concession from Counsel to this effect; it seems also to have been accepted by the Court of Appeal in Curro and Anor v Beyond Productions Pty Ltd (1993) 30 NSWLR 337, at 344C.
The remarks by Palmer J were referred to by Young JA with apparent approval in Sidameneo (No 456) Pty Ltd v Alexander at [82].
[77] A similar view has been taken in other first instance authorities that under the Restraints of Trade Act the person seeking to enforce the restraint has the onus to prove the circumstances from which reasonableness can, as a matter of law, be inferred: OAMPS Insurance Brokers Ltd v Hanna [2010] NSWSC 781 at [69]-[70] (Hammerschlag J); Veda Advantage (Australia) Pty Ltd v De Beer [2016] NSWSC 37 at [48] (Black J).
It is an important consideration in this case that there is an element of novelty in the way that the validity of the relevant restraint of trade is presented for consideration. On the one hand, the restraint was freely agreed to in a contract between two substantial commercial organisations. However, the restraint affects the ability of each party to employ present or former employees of the other, in circumstances where the restraint may act differently than restraints in the employment contracts between each party and its employees. Furthermore, although the restraint operates in a manner that would restrict the way that each party can compete with the other, it does not appear to be a mere restraint on competition. The Services Agreement is one under which Quantum has sub-contracted to provide services to a customer of Schenker. The Services Agreement contemplates that Quantum would build up the capacity to provide the sub-contract services efficiently, but it does not require Schenker to act in Quantum's interests or to acquire a minimum level of services from Quantum, or to acquire services exclusively from Quantum. Quantum is exceptionally vulnerable under the Services Agreement to Schenker being able to take over the 'goodwill' associated with the sub-contract by employing the employees engaged by Quantum to establish the sub-contract business. There may therefore be special considerations that arise at any final hearing concerning the reasonableness of a restraint intended to maintain Quantum's workforce, that do not apply where the practical effect of the restraint is merely to inhibit competition between the parties to the agreement.
In this respect, it is important to note that Gleeson JA stated the essence of the common law restraint of trade principles at [59]. The question will be whether the particular restraint may be enforced because it is reasonably necessary for the protection of the parties concerned and reasonable in the interest of the public. His Honour noted at [64] the observations made by Brereton J (as his Honour then was) concerning the role of legitimate protectable interests, and it is well established that certain interests such as the protection of confidential information and customer connection are legitimate subjects for protection. However, his Honour also considered at [72] the issue of the appropriateness of attempting to ascertain the relevant legitimate interests by placing the relevant agreement in a particular category and then trying to align that category with existing cases.
As the present is an interlocutory application, it is neither necessary nor appropriate for the Court to attempt to address these issues definitively. It is important for the Court to recognise, however, that the ultimate question is whether in all of the circumstances the particular restraint is reasonable, and the question whether the restraint goes no further than to provide reasonable protection of a legitimate interest of the party seeking to enforce the restraint is a subsidiary question designed to elucidate the more general question. Care should be taken, particularly in an interlocutory context, against ossifying the general principle by inappropriately confining its application to common or generally accepted instances that can be demonstrated historically.
The Restraints of Trade Act 1976 (NSW) effects a significant alteration to the common law principles that elsewhere govern the effectiveness and operation of provisions in restraint of trade. As will be seen, the operation of that Act is likely to be crucial to the outcome of any final hearing in this matter. I will not set out the relevant terms of the Act, as they may be found at [60] of the above extract from Isaac v Dargan Financial Pty Ltd, and explained at [61]-[62].
In Woolworths Ltd v Olson (2004) NSWCA 372, Mason P (with whom McColl and Bryson JJA agreed) made the following observations concerning the statement of principle by McLelland J set out above at [61] of the judgment of Gleeson JA in Isaac v Dargan Financial Pty Ltd concerning the operation of s 4(1) of the Restraints of Trade Act:
[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 (see Heydon, op cit, at p 235, Kone Elevators, Rouen v Ryan [2001] NSWCA 230; Industrial Rollformers Pty Ltd & Anor v Ingersoll-Rand (Australia) Ltd [2001] NSWCA 111). In Industrial Rollformers 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. Discussion about the provision's use in relation to an overly broad description of the restrained conduct may be found in Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 337-8 (per Kirby P).
[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 (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.
This passage was approved by Beazley JA (with whom Rolfe AJA) agreed in Rouen.
In the present case, as has been noted, the relevant restraint of trade is clause 13.13 of the Services Agreement, which is an agreement freely entered into between two substantial commercial corporations. However, its effect is to prevent Schenker giving employment for a relatively long period to employees and former employees of Quantum. The restraint will therefore impinge on both Schenker and any individuals that Schenker is restrained from employing. The case therefore raises the question of how the principles governing the operation of provisions in restraint of trade operate at the intersection of restraints on the activities of commercial competitors and restraints on employees seeking alternative employment.
In BIS Industries Ltd v Toll Holdings Ltd [2012] NSWSC 1427, Bergin CJ in Eq expressed the following views concerning the effect of the Court of Appeal of England and Wales decision in Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1958] 2 All ER 65:
[87] On appeal (Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1958] 2 All ER 65) the Court of Appeal (Jenkins, Romer and Ormerod LJJ) considered the two questions; what it was for which protection was required, and what it was against which protection was required. Their Lordships said at 72-73:
As to the first question, we take the answer to be that protection was required by both parties for (a) the adequacy and stability of their respective complements of employees; and (b) as we are prepared to assume, trade secrets and confidential information for which any of their respective employees might have become, or might thereafter become, possessed in the course of their employment. As to the second question, we take the answer to be that the dangers against which protection were required were (a) the unimpeded secession of employees of any grade from the employment of either of the parties to that of the other of them in the competing concern next door under the inducement of higher wages or better working conditions, or merely for the sake of change; and (b) the divulging to their new employer by employees so seceding of any trade secrets or confidential information of which they might have become possessed in the course of their employment with the other party.
…
It is for the court to judge whether an agreement in restraint of trade is reasonable in the interests of the parties. We agree that where traders dealing on equal terms have become parties to (for example) a scheme for maintaining prices or for central selling, and there is nothing in its provisions which is obviously unreasonable in the interests of the parties, the court will be slow to set it aside at the instance of a party who has freely agreed to it. But the mere fact that parties dealing on equal terms have entered into an agreement subjecting themselves to restraints of trade does not preclude the court from holding the agreement bad where the restraints are clearly unreasonable in the interests of the parties.
[88] The Court of Appeal highlighted the fact that the five year "ban" was equally applicable to an unskilled manual labourer who had been in the employment of the plaintiff for a single day as it was to a chief chemist with many years' service (at 73). Their Lordships referred to the "real raison d'etre" of the agreement was the proximity of the two factories and observed that there was no provision limiting the duration of the agreement to the period during which such proximity might continue. Their Lordships held that the reciprocal restraints were unreasonable in the interests of the parties to it and were therefore void and unenforceable.
[89] Their Lordships also said that the "adequacy and stability" of the parties' respective workforce was an interest which employers were entitled to protect by all legitimate means, such as by paying good wages and making employment attractive. However their Lordships said (at 74):
But 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 a 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.
Her Honour noted at [90] that the case before her was different, because the term involved was not a joint embargo on two companies employing each other's employees. It was a promise by the defendant not to solicit the plaintiff's employees for 18 months. Her Honour noted that the term in question, which prohibited solicitation, was subject to the exception that the defendant was free to employ the plaintiff's employees by either a bona fide advertising campaign or a bona fide recruiting campaign "targeted to a wide audience of potential application". That exception proved to be significant to her Honour's decision.
Bergin CJ in Eq expressed the following conclusions:
[99] Consideration of a restraint between two large commercial organisations is different from a consideration of a restraint between an employer and an employee. However if a restraint between two organisations impacts upon employees in an unreasonable manner and in restraint of trade it may be held to be unenforceable. As Lord Hodson said in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269 at 318:
When one remembers that the basis of the doctrine of restraint of trade is the protection of the public interest, it is not difficult to see how the law developed in its conception of reasonableness as the test which must be passed in order to save a contract in restraint of trade from unenforceability.
[100] Clause 3.2 of the Confidentiality Deed is not a clause of the type that fell foul of the restraint of trade doctrine in Kores Manufacturing Co Ltd v Kolok Manufacturing Ltd. It may have been a different matter had the carve out provision not been included. However that provision enabling the employment of any of the employees of BIS whether they were employed at the time of the Confidentiality Deed or otherwise makes reasonable a clause that might otherwise have been unreasonable.
Bergin CJ in Eq, therefore, at [99] noted that a restraint between substantial commercial organisations, while different to a restraint in an employment agreement, may be unenforceable if it impacts upon employees of a party to the agreement "in an unreasonable manner". I do not take this observation to mean that the validity of the restraint should be assessed as if it were somehow part of the employment agreement, so that the reasonableness of the restraint in the actual agreement is to be considered in the same way as if it was a restraint in an employment agreement. Rather, the reasonableness of the restraint in the actual agreement in which it is found must be determined having regard to the effect that it has on the employees of the parties. As the parties may have legitimate interests to protect by way of the actual agreement, the extent to which the protection of those interests may be reasonable may be different to what would be considered to be reasonable protection for an interest that may legitimately be protected by an employment agreement.
The protection of a party's confidential information has long been established as a legitimate basis for protection by restraints of trade. The restraint may go further than to prohibit the employee misusing or divulging the confidential information, and it is established that it may be reasonable in appropriate circumstances to hold that a restraint against an employee taking employment from a competitor is valid.
In Woolworths Ltd v Olson, Mason P said:
[67] A recognised method of such protection is the procurement of a restraint upon the employee given access to such information taking up employment with a competitor whom he might be willing to provide with such information. A reasonable employment restraint is easier to enforce than a breach of confidence or breach of copyright claim; it removes the temptation for the former employee to offer and for the new employer to solicit confidential information; and it provides certainty of definition as regards the area of confidential information to be protected. These interests have been judicially recognised (see Littlewoods Organisation Ltd v Harris [1977] 1 All ER 1472 at 1479, 1485, Wright at 333, Kone Elevators at p 43,834).
[68] This restraint goes beyond a mere covenant against competition. It protects a legitimate interest of the appellant as acknowledged in cl 10(a)(ii) itself. The restraint does not prevent the respondent from earning a living, particularly in light of the provision for Restraint Payment and the capacity of s 4(1) to ensure that public policy is not contravened by allowing cl 10 to have unreasonable ambit.
In Cactus Imaging Pty Ltd V Glenn Peters (2006) 71 NSWLR 9; [2006] NSWSC 717, Brereton J considered the circumstances in which the Court might hold enforceable a restraint in an employment contract against an employee who acquires the employer's confidential information taking employment with a competitor of the employer. His Honour said:
[12] An employer has an interest in its confidential information, which it may legitimately protect by a restraint of trade, even if the information is not in the nature of a trade secret such as to attract equitable protection in the absence of any contractual agreement [Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 326F, 333G-334E, 341G]. Although Mr Gye, who appeared for Mr Peters, submitted, with reference to Faccenda Chicken Ltd v Fowler [1987] 1 Ch 117 and ANI Corporation Ltd v Celltite Australia Pty Ltd (1990) 19 IPR 506, that only a trade secret or equivalent was capable of protection by a restraint in an employment contract, that is not the law in this State, where the Court of Appeal, has declined to follow Faccenda Chicken in that respect in Wright v Gasweld [see, in particular, per Samuels JA at 340-341].
[13] And as Lord Denning said in Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 at 1479, experience has shown that it is unsatisfactory simply to have a covenant against disclosing confidential information, because it is difficult to draw the line between information which is confidential and information which is not, and very difficult to prove a breach when the information is of such a character that an employee can carry it away in his or her head, so that the only practicable solution is to take a covenant from the employee by which he or she undertakes not to work for a trade rival. The permissibility of such restraints for that purpose is well established [Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564, 43,834; Woolworths Ltd v OlsonLindner v Murdock's Garage, 650 (Fullagar J); Portal Software Pty Ltd v Bodsworth [2005] NSWSC 1179, [83]]. Cactus relies on Mr Peters' alleged possession of its confidential information to support not only the covenant in cl 7 against disclosure of confidential information, but also the covenant in cl 9 against soliciting customers.
[14] A plaintiff who seeks to restrain a former employee from using confidential information must be able to identify with specificity, and not merely in global terms, the relevant information [Saltman Engineering Co Ltd v Campbell Engineering Co (1948) 65 RPC 203 at 215; Corrs Pavey Whiting and Byrne v Collector of Customs (Vic) (1987) 14 FCR 434 at 443 (Gummow J); Rosewood Advertising Pty Ltd v Hannah Marketing Pty Ltd [2000] NSWSC 1034, [8]]. Although those cases were concerned with the circumstances in which, even in the absence of a contract, equity imposes an obligation of confidence, the requirement for specificity is no less where a contractual obligation is sought to be enforced. One reason for this is that an injunction in general terms restraining a former employee from using the employer's "confidential information", would inappropriately leave, to an application for contempt, determination of whether particular information was or was not confidential.
See also Willis Australia Group Services Pty Ltd v Griggs [2012] NSWSC 659 at [107] and Pryse v Clark [2017] NSWSC 185 at [73]-[79].
One aspect of the relationship between an employer and its employees that has given rise to uncertainty as to the legitimacy of its protection is the employer's natural objective to maintain a stable workforce.
In Cactus Imaging Pty Ltd v Glenn Peters (2006) 71 NSWLR 9; [2006] NSWSC 717, Brereton J (as his Honour then was) considered the enforceability of a term in an employment contract that restrained former employees from soliciting or enticing away any employee, consultant or contractor of the plaintiff for a period of 12 months following the end of their employment. The controversy between the parties was as to whether a covenant not to solicit employees is enforceable. That is a different question to the one that arises in the present case, which concerns the limits on the circumstances when one competitor can validly agree with another not to employ that other's employees.
Brereton J at [44] noted that in Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd an agreement between two employers in an industry not to employ each other's former employees was held void "at least in part on the basis that it was contrary to the public interest". His Honour said: "Although acknowledging that an employer had an interest in maintaining a stable and trained workforce, Jenkins LJ, giving the judgment of the Court of Appeal, said that an employer had no legitimate interest in preventing an employee, upon termination, taking employment with a competitor merely because the new employer was a competitor, and that save in exceptional cases involving confidential information, a covenant by an employee not to enter into the employment of a competitor would be void (at 74)" [emphasis added].
His Honour then undertook a detailed and insightful analysis of the authorities:
[45] Those observations do not address, at least directly, a covenant binding a former employee not to solicit other employees. However, in Hanover Insurance Brokers Ltd v Schapiro [1994] IRLR 82, Dillon LJ, with the agreement of Nolan LJ, expressed "a general view … that an employer does not have any sort of proprietary interest in a stable team of staff entitling the employer to impose restrictions on solicitation of staff". Shortly afterwards, and without reference to that decision, the opposing view emerged in Ingham v ABC Contract Services (UKCA, 12 December 1993, unreported): Leggatt LJ, with whom Russell LJ agreed, said, in respect of a covenant intended to prevent an employee from poaching his employers' other employees after he had left their employment, that the employers had "a legitimate interest in maintaining a stable, trained workforce in what is acknowledged to be a highly competitive business" which interest they were entitled to protect against solicitation and enticement by the former employee.
Brereton J then analysed a series of overseas cases which considered this divergence of views; being Kao Lee & Yip v Koo Hoi-Yan [1995] 1 HKLR 248 (at 253); BSC Building Materials Supply Co Ltd v Cheung Chi Hung (1998) HKCFI 991; Emperor Resorts International Ltd v Wong Chi Hang (2004) HKDC 50; Dawnay Day & Co Ltd v de Braconier d'Alphen [1997] IRLR 442; TSC Europe (UK) Ltd v Massey [1999] IRLR 22. His Honour then considered a number of cases in this Court as follows:
[50] In this state, Young J (as the Chief Judge then was) enforced a covenant by a former employee not to solicit the employer's customers, but the enforceability of such a covenant does not seem to have been argued [Ecco Personnel Pty Ltd v Barrett (NSWSC, Young J, 2 September 1996, unreported)]. White J reviewed the authorities in Aussie Home Loans, and concluded that a covenant against poaching employees is not necessarily invalid, and may be justified by reference to confidential information which the ex-employee has about the relations between his former employer and its employees (at [24], [26]). However, in that case the restraint was held excessive and void. The analysis in Aussie Home Loans was cited with approval by McDougall J in Kearney v Crepaldi [2006] NSWSC 23, where His Honour expressed the views that, notwithstanding Kores v Kolok, later English cases suggested that an employer's interest in maintaining a stable workforce may be protected at least by a covenant by an employee not after termination to poach further employees (at [57]), and that a covenant given by an employee to an employer prohibiting the employee after termination from soliciting former fellow employees to join a new business venture may not be justified simply by the employer's interest in maintaining a stable trained workforce, but may be justified where the solicitation is based on confidential information which the former employee has concerning the relationship between the other employees and the employer (at [58]):
In other words, it may be justified where the former employee uses (or may use) confidential knowledge gained in the course of the contract of employment to target particular employees and to pitch the terms of offers of employment to them.
[51] However, His Honour added that this was not intended to be a comprehensive statement of the circumstances in which such a covenant may be upheld, but at most a statement sufficient for the purposes of that decision.
[52] The cases appear to have accepted that such covenants are within the restraint of trade doctrine. In New South Wales this is doubly important because, unless they are restraints of trade, the Restraints of Trade Act will not be available to save them to the extent that they are not unreasonable. Such a covenant limits or restricts the ability of a trader bound by it to recruit desirable employees. In that way, it affects the entitlement of the covenantor to carry on trade or business in the manner which he or she thinks most desirable in his or her own interests; that is a restraint of trade within the formulation stated in Attorney-General of the Commonwealth of Australia v Adelaide Steamship Company Ltd [1913] AC 781 at 793-4 (Lord Parker of Waddington), and in Petrofina (Great Britain) Ltd v Martin [1966] Ch 146 at 169 (Lord Denning MR ), 180 (Diplock LJ). In Kores v Kolok, such arrangements were assumed to be within the doctrine. As Sales has pointed out ["Covenants Restricting Recruitment of Employees and the Doctrine of Restraint of Trade" (1988) 104 LQR 600 at 607], a business depends for its profitability and competitivity on three factors: (1) its customers and the proceeds of sales to them; (2) its suppliers and the cost of purchases from them; and (3) its staff, and the cost and value of their labour. Restriction on competition in any of those fields may impact on ultimate profitability. A prohibition on recruiting desirable staff is, therefore, a restraint of trade.
[53] The controversy has been whether the employer has an interest in staff connection recognised by law as legitimate for the purpose of supporting a covenant. The weight of authority favours the view that there is such an interest. Traditionally, it has been said that the only reason for supporting a restraint is some proprietary right of the employer, either trade connection or trade secrets [Herbert Morris Ltd v Saxelby, 710 (Lord Parker of Waddington)].
[54] The more recent cases have tended to support restraints on recruitment on the basis of protection of confidential information; thus it has been said that an employer may be able to demonstrate a legitimate interest in maintaining a stable trained workforce, at least if the former employee may seek to exploit knowledge gained of the particular qualifications, rates of remuneration and so on pertaining to other employees which is confidential to the employer [Dawnay Day & Co Ltd v De Braconier D'Alphen, [45]-[46]; Aussie Home Loans, [24]-[26]; Kearney v Crepaldi, [58]]. Mr Gye submitted that confidential information could not be a sufficient interest to support such a restraint, because it did not permit the inquiry, required by the Faccenda Chicken test, as to whether the relevant information was a trade secret, know-how or trivial, only the first of which was entitled to protection. This submission must be rejected, first because, as has already been explained, the Faccenda Chicken test is not the law in this State; and secondly because a restraint on a former employee carrying on business, which unquestionably may be supported by an interest in protection of confidential information [see [13] above], is open to exactly the same objection.
[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.
Thus, Brereton J recognised that, independently of protecting its confidential information, an employer may have a legitimate interest in the stability of its workforce that may legitimately be protected by a restraint against solicitation of its employees by a former employee in a manner similar to the legitimate protection of the employer's customer connection. Once it is accepted (remembering that the acceptance only need be sufficiently arguable at this interlocutory stage of the proceedings) that an employer may have a legitimate interest in imposing restraints that have the practical effect of protecting the stability of its workforce, the issue becomes the identification of the legitimate interests concerned and what may be acceptable as the reasonable protection of those interests.
It seems to be established that an employer's interest in maintaining a stable workforce does not constitute a legitimate interest that may validly be protected by the insertion of restraints either in employment agreements against employees accepting employment by a competitor, or in agreements between commercial competitors not to employ the other competitor's employees, when the restraint is a 'mere' restraint against one enterprise's ability to compete with another's. There is probably room for argument about what is meant by 'mere' in this context.
If Brereton J in Cactus Imaging Pty Ltd v Glenn Peters is correct, as I am content to accept for the purposes of this interlocutory judgment, a stable workforce adds to the value of the employer's business in the same way as the employer's customer connection and is amenable to protection. The nature of the protection accepted by his Honour was the imposition of a restraint on former employees using their connection with remaining employees to entice them to accept employment with another employer. Such a restraint may be reasonable until enough time has passed so that the former employees have lost any special connection with the remaining employees, perhaps by reason of that connection being supplanted by the connection forged by the employees who replace the former employees.
The present case raises the question whether it is legitimate for an employer to insert into a sub-contract under which the employer agrees to provide services to a customer of its counter-party a restraint against employing its employees during the term of the sub-contract and for a short period thereafter, where the purpose and effect of the restraint is to protect the employer's enjoyment of the commercial benefits that may arise out of the sub-contract. It is at least arguable that such a restraint should not be classified as a mere restraint against competition, but seen in the context of the whole sub-contract and not isolated from it, it is a legitimate protection of the benefits to which the employer should be entitled to enjoy as a result of its entering into the sub-contract and making the investment necessary to enable it to perform the sub-contract.