Terry Cross Financial Services v Michael Misiti & Ors

LEGISLATION CITED : Trade Practices Act 1974 (Cth) Corporations Act 2001 (Cth)

General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 Australian Building Industries Pty Ltd v Stramit BC9706333 (Federal Court of Australia, Northrop, Lindgren and Lehane JJ, 1 December 1997) General Steel and to Dey v Victorian Railways Commissioners (1949) 78 CLR 62 Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87 Webster v Lampard (1993) 177 CLR 598 CASES CITED : Munnings v Australian Government Solicitor (1994) 68 ALJR 169 Australian Liquor Hospitality and Miscellaneous Workers Union v Liquorland (Aust) Pty Ltd (2002) 114 IR 165 Sanders v Snell (1998) 196 CLR 329 Deepcliffe v Gold Coast City Council [2001] QCA 342 Wickstead v Browne 30 NSWLR 1 The Koursk [1924] P 140 Lumley v Gye (1853) 718 ER 749

Halsburys Laws of Australia TEXTS CITED : Clerk & Lindsell on Torts (19th edn, Thomson, Sweet and Maxwell) J.D. Heydon The Restraint of Trade Doctrine (2nd edn, Butterworths, 1999) Fleming, The Law of Torts (9th edn, Law Book) Balkin & Davis, Law of Torts (3rd edn, 2004)

Terry Cross Financial Services (Plaintiff) PARTIES : Michael Misiti (First defendant) Smart Financial Pty Ltd (Second defendant) Unity Financial Planning Ltd (Third defendant)

Mr Hatcher SC (with Mr Easton) (Plaintiff) COUNSEL : Mr Neil SC (with Ms McWilliam) (First and second defendants) Mr Braham (Third defendant) Mr Keller (Millenium 3 Financial Services)

Maguire and McInerney Lawyers (Plaintiff) SOLICITORS : Russell McLelland Brown Lawyers (First and second defendants) Minter Ellison (Third defendant) Norton Smith & Co (Millenium 3 Financial Services)

• 12 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

Hearing: 11 September 2008 Judgment: 19 September 2008

5762/07 Terry Cross Financial Services v Michael Misiti & Ors JUDGMENT 1 Rein J: The plaintiff ("TCF"), for whom Mr Hatcher SC and Mr Easton appear, is engaged in the business of financial services advisor and holds an Australian Financial Services ("AFS") license. The first defendant, Michael Misiti ("Misiti") was employed by TCF from 15 March 2001 to 15 October 2007. The second defendant, Smart Financial Pty Ltd ("Smart Financial") is a company owned by Misiti. Mr Neil SC with Ms McWilliam appears for Misiti and Smart Financial. The third defendant ("Unity) is also engaged in a financial planning services business and entered into an agreement with Misiti and Smart Financial. Unity, for whom Mr Braham of Counsel appears, is an AFS license holder. 2 Millennium 3 Financial Services Pty Ltd ("Millennium") is a corporation owned and controlled by ING Bank Limited. Millennium is an AFS license holder, and TCF is an authorised representative of Millennium. 3 Mr Cross ("Cross"), the principal of TCF, was an authorised representative of Millennium. Misiti was also appointed as a representative of Millennium when he was employed by TCF. 4 The essence of TCF's claim against Misiti is that whilst an employee, he acted in furtherance of his own interest of establishing himself or the newly created Smart Financial as a financial planning service, destroying data of TCF and removing a TCF client data base for use by him as an employee of Smart Financial and authorised representative of Unity. 5 There are some matters that are not in dispute: (1) Smart Financial was established in June 2007 (2) Misiti resigned from TCF on 15 October 2007 (3) Smart Financial entered into an agreement with Unity in September 2007, and with Misiti as guarantor of Smart Financial's obligations, and Smart Financial entered into another agreement with Unity with another person as guarantor. These agreements were expressed to commence on 1 October 2007. (4) On 19 October, Misit and Smart Financial were certified as authorised representatives of Unity (5) Misiti or Smart Financial has sought and possibly obtained the custom of some of the former clients of TCF using Smart Financial as the equivalent "platform" to TCF. 6 There were before me a number of Notices of Motion. One of the Notices of Motion of the Misiti defendants sought to strike out a number of paragraphs of the Statement of Claim (the subject of a draft Amended Statement of Claim). The plaintiff, having considered the arguments advanced by Mr Neil, decided to replead its Statement of Claim, a course accepted by the Misiti defendants, and I do not need to deal further with that motion.

7 The Misiti defendants had filed a Notice of Motion asserting that TCF should be dealt with for contempt of Court - the alleged contempt being, it was said, the provision by TCF to Millennium of a document produced on discovery by Misiti. The allegation was denied by TCF. 8 In connection with their contempt motion, the solicitors for the Misiti defendants issued a subpoena to Millennium and a Notice to Produce to TCF. 9 TCF's response to the Contempt Motion was to file a Notice of Motion seeking to have the Contempt Motion dealt with only after the substantive proceedings. I indicated that in my view the course urged by TCF should be adopted and I do not need to deal with that aspect of the matter any further (it having been indicated by Mr Neil through his junior that written reasons for the conclusion are not required).

10 What remains therefore is Unity's motion to strike out the pleaded case against it - for convenience focussing on the proposed Amended Statement of Claim, which I shall refer to as the "ASTOCL". 11 There are several causes of action pleaded against Unity, namely: (1) that Unity has, by unlawful means, interfered with the trade or business interests of TCF (paras 43-46 of ASTOCL) (2) that Unity induced a breach of Misiti's contract of employment with TCF (paras 50-52 ASTOCL) (3) that Unity and Misiti (or Smart Financial) committed the tort of conspiracy, because they acted in combination or concert or in agreement to injure TCF (paras 57-60 of ASTOCL) (4) that Unity has procured Misiti and or Smart Financial to commit a civil wrong (or wrongs) against TCF (paras 61-62 of ASTOCL) (5) that Unity was a person involved in contravention of ss 79, 911C, 182 and 183 of the Corporations Law (paras 61-70 of ASTOCL) 12 Each of the matters is founded upon the same factual contentions, which are: (1) that Unity placed advertisements in trade publications seeking people who were "experienced financial planners" and who had "suitable expertise, ambition and a loyal client base". TCF claims that the requirement that the applicant have "a loyal client based" indicates that Unity wanted the new recruits to bring with them a client base, and knowing, as they must have, that Misiti was employed, the "loyal client base" which he was expected to bring with him when he and Smart Financial entered into a contract with Unity, was the loyal client base of his employer, TCF; (2) that Unity offered "legal support as necessary"; (3) TCF claims that Unity entered into a contract with Misiti and at a time Misiti was still employed by TCF ; (4) TCF represented that Misiti and Smart Financial were authorised representatives of Unity.

13 To strike out a cause of action pleaded, the Court must be persuaded that the plaintiff's case has no realistic prospect of success, see General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125. In determining this, the Court will assume that the plaintiff's factual allegations can be made out. 14 In Australian Building Industries Pty Ltd v Stramit BC9706333 (Federal Court of Australia, Northrop, Lindgren and Lehane JJ, 1 December 1997), the Full Court of the Federal Court revisited this area, referring to General Steel and to Dey v Victorian Railways Commissioners (1949) 78 CLR 62, Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87, Webster v Lampard (1993) 177 CLR 598, and Munnings v Australian Government Solicitor (1994) 68 ALJR 169, in which the need for great care in the exercise of the power to order summary or final judgment, or in summarily terminating an action, is emphasised. In Webster, The High Court said (per Mason CJ, Deane and Dawson JJ) "Nowhere is that need for exceptional caution more important than in a case where the ultimate outcome turns upon the resolution of some disputed issue or issues of fact" (at p 603).

15 In Stramit, the Court noted that the plaintiff had not had the benefit of discovery of documents, or of cross examination: see p 15. The absence of discovery and interrogatories is a relevant matter here, in my view.

16 Mr Hatcher accepted that there were defects in the pleading against Unity and he indicated that he would like the opportunity to replead. Mr Braham opposed this course on the basis that he submitted repleading could not assist TCF - it simply had no case against Unity based upon facts outlined either in the ASTOCL, or orally.

Inducement of Breach 17 The law relating to inducement of a breach of contract is set out in Halsburys Laws of Australia as follows: "415-1550 The tort of interference with contractual relations is committed where a person knowingly and intentionally interferes with contractual relations or the contractual rights of the complainant, thereby causing damage to that person, where there is no sufficient justification for that interference. It must be shown that there was a contract which had been interfered with by the defendant, whether by inducing one of the parties to break the contract or by interfering with performance of the contract, and that the defendant had sufficient knowledge of the contract to know he or she was hindering or preventing the performance of the contract. It is not sufficient that the defendant hoped, wished or had an 'uncommunicated subjective desire' that the contract would be breached. The interference must be unlawful and may be effected directly or indirectly. Where it is direct, the persuasion, inducement, procurement or other form of interference is regarded by law as wrongful in itself. Where the interference is indirect the acts must be or include an unlawful act and the interference with the contract must be a consequence of that act.

Direct interference may be constituted by direct persuasion or procurement, for example, bribery or threat of force, or hindering or preventing performance of a contract, for example, by physically restraining a contracting party. Actionable indirect interference occurs where persons upon whom the plaintiff relies for the performance of the contract with a third party are induced to breach their contracts with the plaintiff, thereby preventing or hindering performance of the contract".

18 There is no dispute that Unity placed an advertisement in a trade magazine in the terms alleged. There is no dispute that Misiti resigned from his employment with TCF and then became employed by Smart Financial, with Smart Financial in a business relationship with Unity and obligations guaranteed by Misiti. 19 There was, on TCF's case, no written contract with Misiti, and there was no express or implied term that he could not leave TCF's employ, nor any restriction on him being able to commence work for a rival of TCF immediately upon cessation of his employment with TCF, i.e. no restraint of trade clause of a kind that is common in employment contracts. 20 There was dispute between Mr Hatcher and Mr Braham concerning the restrictions which are placed upon an employee after his employment ceases, in the absence of a restraint clause. 21 To place an advertisement seeking employees, to offer an applicant a position and to enter into a contract of employment with the successful applicant who has accepted the offer to commence on a nominated date cannot constitute an inducement to breach a contract, unless the employee is currently under a contract with a fixed term which term has not expired, and the prospective employer knows that that is so or has the means of knowledge and deliberately avoids examining the information, recklessly indifferent to whether the act is a breach or not: see on the latter aspect Australian Liquor Hospitality and Miscellaneous Workers Union v Liquorland (Aust) Pty Ltd (2002) 114 IR 165, 179, and Clerk & Lindsell on Torts (19th edn, Thomson, Sweet and Maxwell) paras 25.19-25.20.

22 Mr Hatcher argued that Mr Misiti as an employee had no loyal clients, rather it was TCF that had the clients and that it was implicit that Misiti was being asked by Unity to bring clients of TCF. The fact that Smart Financial was appointed when Misiti was still an employee of TCF is part of the case that Unity encouraged Misiti to act in breach of his obligations. 23 Mr Braham argued that to seek financial planners who had a 'loyal client base' did not carry with it the implication that the planner would do anything illegal or in breach of his contract with TCF. He submitted that a financial planner employed by XYZ Ltd who leaves that employment on a Tuesday could, on the Wednesday, set up business on his own account and ring every client whose number he can remember and seek their business, save to the extent that the targeted client had a contractual arrangement which itself could not be terminated at will. That, he said, is competition, and he relied on the following passage in J.D. Heydon's The Restraint of Trade Doctrine (2nd edn, Butterworths, 1999): " The Duty Not to Compete This falls into two parts. First, an employee must not compete by soliciting the employer's customers during employment, even though the transfer of custom is only to occur after the termination of the employment; nor may an employee compile lists of the employer's customers during employment for use after departure. But after the termination of employment, the ex-employee may canvass customers freely in the absence of a covenant. And so 'the servant may, while in the employment of the master, be as agreeable, attentive and skilful as it is in his power to be to others with the ultimate view of obtaining the benefit of the customers' friendly feelings when he calls upon them if and when he sets up business for himself'" [ Wessex Diaries Ltd v Smith [1935] 2 KB 80; [1935] All ER Rep 75. is cited in the text.] 24 Mr Braham demonstrated that Unity did not represent that Misiti and Smart Financial were representatives of Unity until 19 October 2007, but on or about 10 September 2007 Misiti, Smart Financial and Unity entered into arrangements that were expressed to commence on 1 October, which included Smart Financial being approved as an Australian Unity financial planner, and Misiti guaranteeing the obligations of Smart Financial (which he controlled and of which it appears likely he was an employee). If Unity knew that Misiti was employed by TCF (until 15 October), and knew that Smart Financial would be utilising the services of Misiti to promote Smart Financial's business in association with Unity, then the combined effect of this appears to me to point to the prospect that factually, Unity could be found to have encouraged Mr Misiti to take steps that were inconsistent with his current contract of employment, quite apart from agreeing that after termination with TCF, Misiti and Smart Financial would be acting as Unity's authorised representatives. The fact that the contract commenced whilst Misiti was still employed is an important matter in my view. Whether the reference to 'loyal client base' of itself indicated some implicit acknowledgement by Unity that Mr Misiti would be encouraged to act inconsistently with his contract of employment it is not necessary to determine, but TCF can rely on it in conjunction with other material. TCF may not be able to particularise precisely Unity's involvement in the alleged wrongdoing of Misiti, because it is not privy to the documentation that passed between Misiti and Unity or their discussions and has not yet had the benefit of discovery and interrogatories. 25 Mr Hatcher indeed did seek an order that TCF only be required to replead after discovery, on which I indicated I would defer ruling. Where a plaintiff does not have access to documents and discussions between two defendants, a difficulty arises because it is accepted that a party must plead its case and only make allegations of fact which it knows there is a basis for, and discovery (and interrogatories) will be based upon these pleadings. It is not uncommon for pleadings to state that "further particulars will be provided after discovery" and this formulation is utilised in the particulars to paras 52, 53, 54, 55 and 61 of the ASTOCL. It is distinctly possible that discovery, and if need be, interrogatories, will elucidate more material than is available at present, and in my view it is premature to strike out the pleading on the basis that TCF has no tenable case. In my view, the factual matters relied upon by TCF provide a sufficient basis for the case on this claim to progress to the stage of discovery (and if appropriate, interrogatories), provided all of the matters presently available to be relied on are articulated in the pleadings, and I will give TCF an opportunity to do so.

Interference with Trade of Business by Unlawful Means 26 The question of whether a tort of interference with trade of business by unlawful means should be recognised in Australia was left open by the High Court in Sanders v Snell (1998) 196 CLR 329 at [30]-[31], so for present purposes it is appropriate to assume that such a cause of action is available. The view has been expressed by McMurdo P in Deepcliffe v Gold Coast City Council [2001] QCA 342, that the unlawful means must be acts forbidden by law, not merely ultra vires or void: whether for example a breach of s 52 of the Trade Practices Act falls within this, might arise. The requirements are an intentional act or acts calculated in the ordinary course to cause harm, the use of unlawful means to interfere with the plaintiff's trade or business, and damage as a consequence. 27 Mr Braham argued that no unlawful act (or means) of Unity has been identified other than inducing Misiti to breach his contract with TCF. No allegation is made that the alleged contravention of s 911C of the Corporations Law interfered with the plaintiff in its trade or business. 28 I think there is much force in this and that it is likely that this head of claim will be found to have no independent substance, but given the view I have reached on two other matters, and because TCF seeks leave to replead (see on the relevance of the first point Wickstead v Browne 30 NSWLR 1 at p 19, per Handley JA and Gipps JA, and see Kirby P at p 7), I am not persuaded that such a case is untenable, and I would permit TCF an opportunity to replead its case.

The tort of conspiracy 29 The plaintiffs allege that the defendants conspired to do an unlawful act by unlawful means causing economic loss to TCF. I do not think that the claim has been properly pleaded or particularised, but essentially the claim can be put this way: Misiti and Smart Financial agreed with Unity to deflect clients of TCF to Smart Financial and hence Unity, and did so whilst Misiti was still employed by TCF. That agreement involved Misiti using unlawful means to achieve that end, because, so it can be inferred it would be said, he was to do that whilst still employed by TCF, and to thereby utilise lists available to him as an employee of TCF and to utilise access to clients only made available to him as an employee of TCF. Again, further particulars may be able to be provided following discovery and interrogatories. I will permit TCF to replead its case. Procurement of a Civil Wrong 30 Procurement of a civil wrong is not a distinct tort. With every civil wrong, (e.g. negligence, defamation) committed by A, a second person, B, could be a tortfeasor as well, A and B have participated in concerted action to a common end, see The Koursk [1924] P 140 at p 155, per Scrutton LJ, Fleming, The Law of Torts (9th edn, Law Book), Balkin & Davis, Law of Torts (3rd edn, 2004) 29.25. The citation relied on by Mr Hatcher from Lumley v Gye (1853) 718 ER 749, does not establish that there is a separate tort of procurement, only that whoever procures a wrong is a joint wrongdoer. The wrong in question in Lumley v Gye was the inducement of breach of contract; see Clerk & Lindsell on Torts, para 25.15. Clerk & Lindsell does not describe a tort of procurement of a civil wrong, see chapter 25. The civil wrong (if it is not conspiracy or inducement of a breach of contract) must be identified and it has not been. The procurement should be pleaded as part of the specific tort which it is said Unity procured. Contravention of Corporations Law 31 The alleged contravention of the Corporations Law point is in a different category to the other claims. Mr Braham drew attention to two fundamental problems with the claim. 32 First, Unity arranged for Misiti and Smart Financial to become authorised representatives of Unity by notifying ASIC and obtaining a certificate, which certificate was issued on 19 October 2007 - Misiti having resigned from TCF on 15 October. There is no assertion that Unity, between 1 October and 19 October, represented to anyone that Misiti (or Smart Financial) were their authorised representatives, and the agreements themselves are not and could not be representations to anyone. 33 Second, s 911C of the Corporations Law, which prohibits a holding out that a person has an AFS license or is within authority, is not a civil penalty provision as defined in s 1317E and is therefore not a provision the breach of which leads to an entitlement for compensation under s 1317HA and is not a contravention that anyone other than ASIC can apply for a pecuniary penalty order in respect of: see s 1317J(1) and (3A). 34 TCF seeks an order under s 1317J(2) (see para 65 of the ASTOCL) and it is not available by reason of the legislative framework Unity submits. 35 Neither the ASTOCL nor the particulars supplied (see Exhibit A, (3)(b)) provide any basis for the allegation that Unity breached s 911C of the Corporations Act and the pleading ought be struck out on that ground. A further reason is that breach of s 911C does not found a claim under s 1317J. However, there are other breaches of the Corporations Act alleged against Misiti and which TCF claims Unity was involved in, which remain and to which I think the reasoning earlier set out in relation to inducement of breach of contract applies. 36 There arose in the course of argument, reference to the question of whether Unity might, even without knowledge of Misiti's wrongdoing (if such were established), be liable as principal or on the basis of vicarious liability, either during the period that both the Unity contract and TCF contract were on foot, or after the TCF contract had been terminated. No such case has yet been pleaded, and Mr Hatcher did not argue that this was a further basis for refusing to strike out the claim against Unity, so I do not need to consider the point. **********

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