Court of Appeal (WA)|2007-08-13|Before: Pullin JA, Lure JA, Buss JA

SMITH -v- NOMAD MODULAR BUILDING PTY LTD [2007] WASCA 169 (13 August 2007)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : SMITH -v- NOMAD MODULAR BUILDING PTY LTD [2007] WASCA 169

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : NOMAD MODULAR BUILDING PTY LTD -v- SMITH [2007] WASC 117

Restraint of trade - Employment contract - Noncompletion clause - Confidential information - Employee resigning - Seeking to work for former employer's competitor - Injunction to restrain such employment - Whether restraint reasonable

1 McLURE JA: The Court dismissed this appeal on 11 July 2007. These are my reasons for joining in that decision. The facts are set out in the reasons for judgment of Pullin JA and not repeated here unless required for an understanding of these reasons.

2 The appellant terminated his employment with the respondent to take up a position with its competitor. The respondent was in the business of the design, manufacture and supply of transportable buildings, particularly in the mining industry. The appellant was employed as the respondent's general manager of manufacturing. He reported to the Board on the manufacturing process and managed the manufacturing supervisors. The appellant was a senior employee of the respondent and his remuneration package reflected his seniority.

3 The employment agreement between the appellant and the respondent was in writing and contained a confidentiality clause, a non-competition clause and a non-solicitation clause. The non-competition clause prohibited the appellant, without the prior written consent of the respondent, from being directly or indirectly engaged or concerned or interested in any competing business in the restraint area during the restraint period. The restraint area is Western Australia and Queensland, which is where the respondent carries on business, and the restraint period is six months from termination. The appellant expressly acknowledged in the contract that the restraint provision was fair and reasonable.

(1) in failing to find that the sole or principal interest that the respondent sought to protect was the interest in "freedom from competition by the appellant working for a rival by locking him in as an employee of the respondent", which interest was not entitled to protection;

(2) in failing to consider the effect of the restraint on the appellant in determining whether it was reasonable;

(3) in taking into account the acknowledgements of reasonableness in the employment contract;

(4) in finding that the restraint was reasonable because the respondent had an interest in protecting its confidential information without considering the matters in (1) and the nature of the confidential information.

5 The respondent filed a notice of contention seeking to uphold the Master's decision on the further basis that the respondent had a legitimate interest in having an opportunity to replace a senior manager in a key area of its business and to recover from the resulting disruption to its business and goodwill before the senior manager was able to work for a competing business.

6 The test to be applied in determining the validity of a restraint of trade was stated by Lord Macnaghten in Nordenfelt v The Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565 in a passage that has been cited with approval in many cases. Lord Macnaghten said:

"All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public."

7 The validity of the restraint must be decided as at the date of the contract: Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288 at 318 per Walsh J. However, subsequent developments may be looked at, not to determine whether the agreement was reasonable as between the parties but to determine whether it was a reasonable one to make at the relevant time, having in mind the best estimate they could make for the future: Putsman v Taylor [1927] 1 KB 637 at 643.

8 A restraint is reasonable in relation to the restraining party if it is necessary for the adequate protection of that party and reasonable in relation to the party restrained if it preserves the fullest liberty of action consistent with that protection: Brightman v Lamson Paragon Ltd (1914) 18 CLR 331 at 337 per Isaacs J; Buckley v Tutty [1971] HCA 71; (1971) 125 CLR 353 at 376.

9 In substance, the appellant contended that the Master should have made a finding as to the respondent's subjective intention or purpose in seeking a restraint. The subjectively determined intention or purpose of a party in seeking or agreeing to the inclusion of a restraint of trade is irrelevant. Whether a restraint of trade is reasonable is a question of law which depends on the true construction and legal effect of the contract: Amoco Australia at 305 per Walsh J; Haynes v Doman [1899] 2 Ch 13 at 24 per Lindley MR.

10 Construing a contract requires attention to the language used by the parties, the circumstances which the document addresses, and the objects which it is (objectively) intended to secure: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40]; McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 at [22] per Gleeson CJ.

11 On its proper construction the restraint clause does not prevent the appellant from leaving the respondent or otherwise "[lock] him in as an employee of the respondent". The employment contract was terminable (and terminated) by the appellant on one month's notice.

12 The proper course is to examine the range of interests relied on by the respondent said to require protection and to determine whether one or more of those interests are reasonable by reference to the interests of the parties to the contract and the interests of the public. In addition to the protection of confidential information (dealt with below) the respondent claimed the clause protected its goodwill. The factual background established by the evidence was as follows. At the time of entry into the contract: (1) the respondent was operating in a highly competitive industry; (2) as a result of the resources boom in this State, demand for senior staff in the industry in which the respondent operated exceeded supply, with the consequence that senior staff were difficult to replace, there was a significant delay in filling vacancies and when recruited, months of training was necessary; (3) the cumulative effect of these matters would be disruption to the respondent's business, impairment of the efficient and timely performance of its contractual obligations and thus detriment to the goodwill of its business which detriment would be exacerbated by the senior employee going to a competitor who would exploit this period of instability in the respondent's business.

13 This indirect impact on goodwill has not been recognised in any authority to which we were referred as a legitimate interest justifying a non-competition clause in an employment contract. Perhaps that is not surprising in view of the unusual concatenation of events resulting in a readjustment in some industries in the relative bargaining power between employer and employee. The respondent relied on the decision of Brereton J in Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717. The court in that case was considering the validity of a restraint clause prohibiting a former employee from soliciting any employee of his former employer. The court (at [55]) upheld the validity of the restraint on the basis that the employer had a legitimate interest in maintaining a stable trained workforce and that staff connections constituted part of the intangible benefits which may give a business added value and thus comprise part of its goodwill. It is unnecessary for this Court to determine the correctness of that decision because of the factual differences. In particular, the opportunity to know and potentially influence a former employer's customers or staff, is a specific incident of, and arises directly from, the former employee's employment.

14 However, if any actual or potential effect on goodwill, direct or indirect, is a protectable interest of the employer, that would justify a restraint clause preventing a former employee taking employment with a competitor merely because the new employer was a competitor. I am not presently persuaded that an indirect effect on goodwill gives rise to an interest justifying protection. However, it is unnecessary to determine the notice of contention on that ground. A restraint clause must preserve the fullest liberty of action consistent with the protection of the employer's legitimate interest. The disruption of which the respondent complains could have been avoided by making the contract terminable on six months' notice. I accept that would not be appropriate in circumstances where an employee was in possession of confidential information that itself justified a restraint of trade. Thus, the outcome of the appeal depends on the correctness of the Master's decision.

15 There is no foundation to the appellant's claim that the Master failed to consider the effect of the restraint on the appellant in determining reasonableness. The Master considered whether the respondent had a legitimate interest that could be the subject of protection and whether the restraint went no further than was necessary to protect that interest (at [30] - [36]). The factors relevant to the second aspect of the inquiry address the reasonableness of the restraint from the employee's perspective. Further, as the Master determined (at [31]), the restriction did not in effect deprive the appellant of all practical opportunities for employment in the restraint period. Although the appellant had worked in the transportable building industry for 19 years, from 2001 to 2006 he worked as the general manager for DBS Fencing and subsequently purchased a retail business which he operated jointly with his wife. Thus, he had skills and experience outside the industry the subject of the restraint. I would dismiss ground 2.

16 The appellant also contends the Master erred in taking into account the acknowledgement of reasonableness in the employment contract between the appellant and the respondent.

The Master said (at [29]):

" ... [H]aving ceased employment with the [respondent], the [appellant] intends to take up employment with Australian Portable Buildings Pty Ltd. He has entered into an employment agreement with that company. That employment agreement contains restraints which are at least equal to, and probably greater than, the restraints to be found in the agreement between the [respondent] and [appellant]. That leads to this remarkable position. The [appellant], when he signed his employment agreement with the [respondent], acknowledged that the restraints contained in that agreement were fair and reasonable. In the agreement he signed with Australian Portable Buildings Pty Ltd, he acknowledged that the restraints contained in that agreement were fair and reasonable. Faced with these two documents, in cross-examination he could not bring himself to say that he thought that any of the restraints ... were unreasonable. So he would have the Court declare that the restraints are unreasonable no matter what he or two major players in the industry think is appropriate."

17 As previously noted, it is for the judge to decide as a matter of law whether a restraint is reasonable. The assessment of the contractual parties on that subject is not determinative but neither is it irrelevant, particularly where, as here, competent parties contract at arms length by reference to their commercial assessments and interests: Amoco at 294 per Menzies J, 307 per Walsh J, 317 per Gibbs J.

18 Further, the fact that both the respondent and the appellant's new employer imposed such a restraint is relevant. In those circumstances, it cannot be said that it is extremely unusual or almost unknown for restrictions of that nature to be imposed in the industry: Sir W C Leng & Co Ltd v Andrews [1909] 1 Ch 763 at 770 per Fletcher Moulton LJ; J D Heydon "The Restraint of Trade Doctrine" (2nd ed) at 35. I would dismiss ground 3. I note for the record that it was not contended that the restraint was unreasonable because the contract was terminable on one month's notice. If that had been raised it would have been necessary to determine whether the non-competition clause should be construed as containing an implication that the respondent could not unreasonably withhold its consent to the appellant working for a competitor.

19 Finally, the appellant challenges the Master's finding that the protection of the confidential information was an interest justifying protection by a restraint of trade clause. The Master found that the appellant did possess information confidential to the respondent. He said (at [13]):

"The [appellant] was the head of the manufacturing section of the [respondent]. It is inevitable that he, during his 12 months of employment, picked up concepts and technical and operational information used by the company. He also undoubtedly had an insight into the financial affairs of the [respondent]. He received management reports, albeit in somewhat limited form. These reports disclosed in some detail the financial position of the [respondent]. They showed the work which had been obtained, work which had been tendered for and tenders on which the [respondent] had been unsuccessful. All of this information was confidential."

20 The Master also found (at [36]) that (1) it would be very difficult for the respondent to prove a breach of the obligation not to use confidential information when it was of such a character that the appellant could carry it away in his head; (2) there were risks that the appellant would use the respondent's confidential information in the employ of his new employer; (3) the respondent had no way of knowing when the appellant might breach the agreement; (4) the difficulties were such that the only practicable solution was a restraint which prevented the appellant from working for a trade rival. There is no challenge to these findings.

21 Having regard to the appellant's senior position with the respondent which was at the core of the respondent's business, the highly competitive nature of the market in which the respondent operated, the findings on confidentiality, the scope and period of the restraint and the fact that the restraint would not sterilise the appellant's capacity to earn an income in the restraint area or the restraint period, I was satisfied that it was open to

the Master to conclude that the restraint clause protected a legitimate interest and was reasonable in the circumstances.

22 PULLIN JA: This is an appeal against the judgment of Master Sanderson. The Master granted the respondent an injunction to enforce a restraint of trade clause in the form a non-competition clause contained in an employment agreement made between the parties. The judgment also dismissed a counterclaim by the appellant for a declaration that cl 13 of the employment agreement was void.

23 The facts which form the background to the agreement are as follows. The respondent operated a business which was owned by a parent company, Nomad Building Solutions Ltd. The parent, through the respondent and through another company, engaged in the business of the design, manufacture and installation of transportable buildings and the hiring of transportable buildings. This work was carried out for clients both in the mining and resources sector and in the commercial sector generally. The respondent commenced operations in Queensland in January 2006 and roughly 80 per cent of its operations are in Western Australia, while 20 per cent of its operations are in Queensland. The respondent had its main operations located at Henderson with other operations at Bibra Lake and Wangara. The respondent in its business gained technical and operational information and financial information showing work which had been obtained, work which had been tendered for and tenders on which the respondent had been successful, all of which the respondent wished to keep confidential. More particularly, the respondent had in its possession information about what the respondent paid for materials from suppliers, what subcontractors were charging the respondent for projects, what the respondent was charging its customers for projects, the work which the respondent was seeking to obtain, the respondent's profits and margins of revenue over costs, the respondent's financial performance and the respondent's strategic plans and financial forecasts.

24 There was a tight labour market prevailing at the time the contract was entered into. The appellant had worked in the modular building industry from 1981 through until 2000. In August 2000 he left that industry and in May 2003 he purchased a retail business and worked in that retail business through until the date when he entered into the contract with the respondent.

25 The appellant was approached by the managing director of the respondent, Mr Guy, and asked to return to the modular building industry and to work for the respondent as its general manager of manufacturing.

The appellant was offered the employment contract to read. The agreement which he read contained a confidentiality clause (cl 12), in which each party acknowledged the existence of confidential information defined in the agreement as follows:

"Confidential Information means all:

(a) know-how, trade secrets, ideas, concepts, technical and operational information, owned or used by the Company or any of their Related Bodies Corporate;

(b) information concerning the affairs or property of the Company or any Related Bodies Corporate or any business, property or transaction in which the Company or any of their Related Bodies Corporate may be or may have been concerned or interested;

(c) details of any customers or suppliers of the Company or any of their Related Bodies Corporate;

(d) information about the terms or effect of this Agreement; and

(e) information which by its nature or by the circumstances of its disclosure, is or could reasonably be expected to be regarded as confidential to:

(i) the Company or any of their Related Bodies Corporate; or

(ii) any third party with whose consent or approval the Company or any of their Related Bodies Corporate uses that information,

which is not publicly available without breach of this Agreement."

Clause 12 prohibited the employee, either during or after employment, from divulging to any person, or using, any trade secret or any confidential information as defined.

26 The non-competition clause, cl 13 which is under consideration, read as follows:

"13. Non-Competition

13.1 Except as provided in clause 13.2, in consideration of the Salary Package, the Employee must not in the Restraint Area, during the operation of this Agreement and for the Restraint Period, without the prior written permission of the Company directly or indirectly be engaged or concerned or interested in any Competing Business.

13.2 If this Agreement and the Employment are terminated by the Company in accordance with clause 3.2(1), Error! Reference source not found. [sic] or 3.3 then, in consideration of the Salary Package, the Employee must not during the operation of this Agreement or for the period specified in Item 9 of Schedule 1 immediately following the Termination Date, without the prior written permission of the Company directly or indirectly be engaged or concerned or interested in any Competing Business.

13.3 The Agreement by the Employee in clause 13.1 and 13.2 applies to the Employee acting:

(1) either alone or in partnership or association with another person;

(2) as principal, agent, consultant, adviser, director, officer or employee in a management position.

27 There was also a non-solicitation clause, cl 14.

28 The agreement proposed that it could be terminated by either side on one month's notice. The position offered was "general manager of manufacturing", with a salary specified of $120,000 per annum plus superannuation and other benefits including the use of a mobile phone, a motor vehicle allowance of $18,000 and a fuel card. In addition there was provision for payment of bonuses.

29 The employee's duties were listed in a schedule but they were not exhaustive. They were to provide management to manufacturing supervisors in coordinating contractors and labourers in the manufacturing process, to provide feedback to the CEO regarding the manufacturing process and to provide monthly reports to the Board on the manufacturing process. This would have made it clear to both parties that the appellant would likely come into possession of important strategic and operational information.

30 The restraint area related to Queensland and Western Australia and the restraint period was six months from termination of employment. The parties then entered into the contract on 7 March 2006.

31 There was evidence that the appellant received monthly management reports and attended monthly management meetings. From these, and from other information available to him, the appellant knew what the respondent charged many of its customers, was aware of work the respondent was seeking to obtain in the course of his employment, was aware of major tenders lost by the respondent and he gained information about the respondent's profits and margins of revenue over costs. The appellant sought to diminish this by giving evidence that he knew what the respondent charged some of its customers and was aware of some of the work the respondent was seeking. In my view the difference is not significant.

32 One year later on 7 March 2007 the appellant accepted an offer of employment from one of the respondent's competitors, Australian Portable Building Pty Ltd and, but for an interlocutory injunction obtained by the respondent, the appellant would have commenced employment with the latter company as its general manager for Western Australia on or about 10 April 2007.

33 The proceedings commenced by the respondent were expedited. The trial took place on 14 and 15 May 2007 and judgment was delivered by Master Sanderson on 16 May 2007. The Master held that the restraint clause was reasonable as between the parties and the public. He held that it was a clause which protected a legitimate interest recognised at law, namely the protection of confidential information, and that the area of restraint and the time of restraint were also reasonable. As a result judgment was entered for the respondent and the appellant's counterclaim dismissed.

34 The appeal by the appellant has also been expedited.

35 Covenants that restrain an ex-employee from competing with the ex-employer are at common law contrary to public policy and void unless it can be justified by the special circumstances of the case. Special circumstances means no more than the facts of the particular case from which reasonableness can be inferred. The Court will judge whether the restriction is reasonable having regard to the interests of the parties concerned and to the interests of the public. If the restraint is not reasonable by reference to the interests of the parties and the public then it is contrary to public policy and void. Buckley v Tutty [1971] HCA 71; (1971) 125 CLR 353 at 376; Lindner v Murdock's Garage [1950] HCA 48; (1950) 83 CLR 628 at 653 and Portal Software International Pty Ltd v Bodsworth (2005) NSWSC 1179 per Brereton J at [63].

36 An employer is not entitled to be protected against mere competition, but a restraint clause to protect confidential information which is reasonable as to the time and geographical extent will not be contrary to public policy.

37 In Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717, Brereton J said at [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 ... "

"And as Lord Denning said in Littlewoods Organisation Limited 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."

38 In this case the finding of the Master was that the respondent did have an interest in confidential information which it was entitled to legitimately protect by the restraint clause.

39 There was an argument advanced by the appellant that the information was not sufficiently confidential to support the reasonableness of the restraint clause, but that was a matter of assertion only. The appellant was a top level employee and his salary package reflected this. As the general manager of manufacturing he was privy to much strategic and operational information which a competitor would be interested to know and which the respondent was entitled to keep confidential by contractual means.

40 The High Court has said that the remuneration of the employee may be (but not "must be") taken into account when considering reasonableness: see Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288 at 315 - 316 where Gibbs J said:

"The requirement that the restriction be reasonable in the interests of the parties has been explained as meaning that the restraint 'must afford no more than adequate protection to the party in whose favour it is imposed' ... or in other words, 'does the restriction exceed what is reasonably necessary for the protection of the convenantee?' ... The test thus stated suggests that it is not material to consider the effect of the contract on the covenantor. It is established that the court is not entitled to enquire into the adequacy of the consideration for a restraint, that is, the court may not weigh whether the consideration is equal in value to that which the covenantor gives up or looses by the restraint ... Nevertheless the fundamental rule remains that the restraint must be reasonable in the interests of the contracting parties, and it would not be in the interest of a covenantor to subjective himself to any restraint unless he received some advantage by so doing. In my opinion it is permissible, in asking whether a restraint is reasonable in the interests of the parties, to consider, as part of the circumstances of the case against which the question of reasonableness is to be decided, the quantum of consideration received by the covenantor and the effect of the agreement on the position of the covenantor."

41 Even if the Master erred in not doing so, a consideration of the amount of the appellant's remuneration and terms does not alter the outcome. The appellant had a significant salary package for which he promised not only to work and carry out his duties but also to abide by the restraint clause.

42 In my opinion the period of time, six months, was a reasonable period of restraint in the circumstances. The contract was one which allowed for termination on one month's notice but it is hardly likely that the parties entered into this contract intending that the contract would only last for one month. The remuneration agreed to by the parties was significant and, in my opinion, the remuneration package was one which reflected the work that was to be done and the restraint that the appellant agreed to. There was no argument suggesting that the geographical area was unreasonable.

43 There was an argument advanced by the appellant that Mr Guy, on behalf of Nomad, intended by entering into the agreement and intended by the restraint clause to encourage the appellant to stay in employment, to discourage him from leaving and to prevent him from finding other work after his employment finished. The respondent denied that this was the effect of the evidence but it is unnecessary to resolve that debate because, even if that was Mr Guy's intention, the existence of the legitimate interest supporting the restraint clause was what was relevant. The fact that the employer had a subjective intention to contract contrary to the law is not a subject to be examined when the Court considers the issue of reasonableness. The Court is concerned not with the subjective intention of the contracting parties but with the objective effect of the restraint clause. See Heron v Port Huon Fruit-Growers Co-operative Association Ltd [1922] HCA 20; (1922) 30 CLR 315 at 324; Buckley v Tutty (supra) at 376. At the trial during cross-examination Mr Guy was asked a question about his opinion concerning the fairness of the clause. Just as his intention at the time he entered into the contract is irrelevant, so was his opinion, after it was signed, about its fairness.

44 The respondent filed a notice of contention arguing that, in addition to the protection of confidential information, the legitimate interest which the respondent was entitled to protect was its goodwill, and that its goodwill could be effected by a senior employee leaving and going over to an opponent. In my view it is not necessary to decide whether that is a legitimate interest which would support a restraint clause. That issue would only have arisen if it had been held that there was not a legitimate interest in protecting the confidential information.

SMITH -v- NOMAD MODULAR BUILDING PTY LTD [2007] WASCA 169 (13 August 2007)

At a glance

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Judgment (67 paragraphs)

SMITH -v- NOMAD MODULAR BUILDING PTY LTD [2007] WASCA 169 (13 August 2007)

Cases Cited (7)