Thinkstorm Pty Ltd v Farah

Supreme Court of NSW|2017-01-27|Before: Lindsay J

Solicitors: Plaintiff: Argus Lawyers Defendant: Gilchrist Connell File Number(s): 2016/00352313

INTRODUCTION

In proceedings commenced by summons, and conducted on an expedited basis (during the Court's vacation) without pleadings, the plaintiff seeks to enforce against the defendant (a former employee of the plaintiff) a contractual restraint of trade provision expressed to operate for a period of 12 months from termination of the defendant's employment.

THE FACTUAL MATRIX

There is no dispute that: 1. By profession, the defendant is a computer engineer with expertise (independent of any training provided by the plaintiff) in use of the computer software system known as "WorkBrain". 2. "WorkBrain" is a workforce management software system (developed in Canada, the defendant's country of origin) which enables employers to manage their workforce and, in particular, to manage human resources, employee entitlements, employment rosters and leave arrangements. 3. Under a contract of employment between the parties (the terms of which changed from time to time), the defendant was employed by the plaintiff between 25 October 2011 and 4 November 2016 or thereabouts. 4. Throughout the time that the defendant was employed by the plaintiff he worked, at the direction of the plaintiff, for Queensland Health. 5. The plaintiff is and was at all material times engaged in the business of providing recruitment and consulting services to Queensland Health for a fee paid by Queensland Health. 6. Queensland Health is and was at all material times a client of the plaintiff's business. 7. Queensland Health from time to time retains a number of corporations (of which, one is the plaintiff, another is Paxus Australia Pty Ltd) to provide WorkBrain technical services to it as consultants. 8. The defendant's employment came to an end, at the election of the defendant, following upon his service on the plaintiff (on 21 October 2016) of two weeks' notice of termination, which expired on 4 November 2016. 9. Having terminated his employment contract with the plaintiff, the defendant continued providing services to Queensland Health, in a different position within the agency, as an employee of Paxus Australia Pty Ltd (on a salary package higher than that then available to him via the plaintiff). 10. On the same day that he gave notice to the plaintiff, the defendant signed a written contract with Paxus Australia Pty Ltd (bearing that date, 21 October 2016), which provided for him to work with Queensland Health, as an employee of Paxus Australia Pty Ltd, for a period commencing on 7 November 2016 and ending on 5 May 2017.
The parties agree that their dispute is to be determined in accordance with the law of New South Wales. They accept that, if necessary and appropriate, resort may be had to the Restraints of Trade Act 1976 NSW to uphold the restraint provisions on which the plaintiff relies. Cf, JDF Heydon, The Restraint of Trade Doctrine (Lexis Nexis, Australia, 3rd ed, 2008), page 301.
Between 25 October 2011 and 30 June 2014 or thereabouts, the terms of the defendant's employment by the plaintiff were governed, successively and uncontroversially, by three written contracts: 1. The first contract document (dated 25 October 2011) provided for the defendant to commence work on 7 November 2011, and it contemplated that his employment would continue until a date no later than 31 August 2012. 2. The second contract document (dated 27 June 2012) provided for the defendant to commence work on 1 July 2012, and it contemplated that his employment would continue until a date no later than 30 June 2013, with an option to extend. 3. The third contract document (dated 23 September 2013) provided for an indefinite term of employment, determinable on two weeks' notice.
The parties are in dispute as to the terms of the contract that governed their relationship on and from 1 July 2014. They are, however, agreed that the contractual terms for which the document dated 23 September 2013 provided were displaced by a new contract, a significant feature of which was that the defendant's "annual salary" equivalent was reduced from $241,647.60 to $188,400.
The necessity for a new form of contract arose from requirements of Queensland Health in its dealings with the plaintiff.
The plaintiff contends, and (by his counsel) the defendant denies, that the terms of the parties' contract are found in a letter dated 30 June 2014, addressed by the plaintiff to the defendant, and ancillary documents.
The defendant's denial is based upon the facts that: (a) introductory paragraphs of the letter characterise it as a "letter of offer"; (b) under the heading "acceptance of offer", the letter invited the defendant to return to the plaintiff a signed copy of it "to confirm" his "acceptance" of the offer; and (c) the plaintiff has been unable to locate in its records any copy of the letter bearing the defendant's signature as an endorsement of his acceptance.
Notwithstanding the absence of any copy of the letter bearing the defendant's endorsement, subject only to one possible qualification, both parties conducted their relationship on the basis that the contract was governed by the letter dated 30 June 2014. Importantly, the defendant was paid, and he accepted that he had no entitlement to be paid more than, the reduced salary package for which the letter provided. In cross examination, he readily accepted that he had not, before commencement of the proceedings, disclaimed the contractual force of the terms contained in the letter. In giving evidence, he also freely conceded that he was not prepared, on oath, to deny that the terms of his contract with the plaintiff were to be found in the letter.
Over objections by counsel for the plaintiff, counsel for the defendant endeavoured, without any substantial forewarning, to run a case that alleged that, as the plaintiff had not paid to the defendant "annual leave entitlements" referred to in a document entitled "standard terms and conditions" forming part of the letter dated 30 June 2014 (incorporating, by reference, provisions of the Fair Work Act 2009 Cth and the Fair Work Regulations 2009 Cth), the Court could not safely conclude that the parties had conducted their relationship on the basis of the terms set out in the letter and ancillary documents.
When confronted in cross-examination with the proposition that the defendant had not been paid his annual leave entitlements, Mr CM Hughes (the sole director and secretary of the plaintiff) denied the allegation.
I am satisfied that, even if it be the fact (which I am not in a position to accept or reject) that the defendant was not paid annual leave entitlements due to be paid by the plaintiff, that fact does not stand in the way of a finding (which I make) that, by conduct, the defendant accepted the offer conveyed to him by the plaintiff in the letter dated 30 June 2014.
The absence of a copy of the letter signed by the defendant does not preclude a finding that the plaintiff's offer was in fact, by conduct, accepted: Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1998) 14 NSWLR 523.
The defendant's acceptance of his salary reduction can be explained only as an acceptance that the terms of his employment on and from 1 July 2014 were governed by the documentation dated 30 June 2014. That he gave the plaintiff two weeks' notice of termination of his employment might be said to be consistent with both the letter dated 30 June 2014 and the parties' earlier contractual documentation, but the salary reduction cannot be explained away. If (despite Mr Hughes' denial) the plaintiff did not pay to the defendant annual leave entitlements, that assumed fact is not, of itself, inconsistent with the letter dated 30 June 2014 having contractual effect.
So far as is material, the 2014 contract includes an undertaking given by the defendant to the plaintiff to the effect that he will not directly or indirectly for a period of 12 months from the termination of his employment (for whatever lawful reason): 1. solicit, canvas, deal with or approach any person, firm or company who, to his knowledge, was provided with goods or services by the plaintiff at any time during the last 12 months of his employment by the plaintiff; and 2. accept orders from any person, firm or company for goods or services similar to or competitive with the goods or services previously provided by the plaintiff to that person, firm or company during the last 12 months of his employment, and with whom he had regular personal dealings during the course of his employment by the plaintiff.

APPLICABLE PRINCIPLES

The parties are agreed that a restraint of trade of this character is to be presumed to be invalid unless the plaintiff proves that it is reasonable.
The defendant contends that such proof is wanting. He says that the plaintiff lacks a "protectable interest" and, in any event, that the restraint is unreasonable because the plaintiff was, in substance, little more than an employment introduction agency.
There is no dispute between the parties that the principles to be applied can be found conveniently summarised by Brereton J in Portal Software v Bodsworth [2005] NSWSC 1179 at [63]-[68]: "[63] At common law, a restraint of trade is contrary to public policy and void, unless it is justified by the special circumstances of the particular case, for which purpose it is sufficient justification that the restriction is reasonable having regard to the interests of the parties concerned and in reference to the interests of the public, so that while affording adequate protection to the party in whose favour it is imposed, it is not injurious to the public [Nordenfelt v Maxim Nordenfelt Guns & Ammunition [1894] AC 535, 565; Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 706, 707; Lindner v Murdock's Garage (1950) 83 CLR 628, 653]. While the cases refer to "special circumstances" justifying a restraint, that means no more than facts of a particular case from which reasonableness can be inferred [J D Heydon, The Restraint of Trade Doctrine, 2nd Ed, p29]. If the restraint is not reasonable in reference to the interests of the parties and the public, it is contrary to public policy and void [Buckley v Tutty (1971) 125 CLR 353, 376]. This test reconciles two conflicting policies, first "that a man should be free to use his skill and experience to the best advantage and should not be put in the position of a slave", and secondly, that covenants should be observed and enforced [Herbert Morris Ltd v Saxelby [1915] 2 Ch 57, 76; [1916] 1 AC 688; Attwood v Lamont [1920] 3 KB 571, 577]. [64] While courts commence from this same general principle in all cases of restraint of trade, a more rigorous approach is applied to restraints in employment contracts than in contracts for the sale of goodwill [Nordenfelt, 566; Mason v Provident Clothing & Supply Co Ltd [1913] AC 724, 731, 738; Herbert Morris Ltd v Saxelby [1915] 2 Ch [77]. A stricter and less favourable view is taken of covenants in restraint of trade between employer and employee, than in commercial agreements [Geraghty v Minter (1979) 142 CLR 177, 185; Heydon, pp68-69; Woolworths Limited v Olson [38]]. [65] An employer is not entitled to be protected against mere competition; the legitimate interests of an employer which may be the subject of protection by covenant are in the nature of proprietary subject matter [Vandervell Products Ltd v McLeod [1957] RPC 185, 192; Tank Lining Corp v Dunlop Industrial Pty Ltd (1982) 140 DLR (3d) 659, 664], including the employer's trade secrets and confidential information, and goodwill including customer connection. [66] In order to determine whether a restraint exceeds what is necessary for the protection of the legitimate interests of the employer and therefore void, it is necessary first to construe the restraint. Absent resort to the Restraints of Trade Act, it is then necessary to consider whether, on the particular facts proved, the restraint so construed is reasonable. [67] A restraint is to be interpreted, for the purposes of ascertaining its real meaning, independently of the rules prescribing tests of reasonableness for the purpose of ascertaining its validity [Butt v Long (1952) 88 CLR 476, 487; Geraghty v Minter, 180]. Nonetheless, where there is ambiguity, a covenant in restraint of trade in an employment contract will be construed in favour of the employee, so that a narrower construction of the scope of a restraint will be preferred to a broader construction, when both are reasonably available [Mills v Dunham [1891] 1 Ch 576, 589-90; Vandervell Products Ltd v McLeod, 193; Littlewoods, 1486; Butt v Long, 487] - though this does not authorise a restrictive interpretation of general words simply to save a covenant from invalidity [Butt v Long, 487; Galbally [108]]. In Australia, Butt v Long precludes the more liberal approach to construction of restraints adopted by Lord Denning MR in Littlewoods Organisation Ltd v Harris [1977] 1 WLR 14, 72, by which courts construe wide words narrowly so as to make the clause reasonable and therefore enforceable, interpreting them from the perspective that the parties' object is legality, and if the words of the restraint are so wide that on a strict construction they cover improbable and unlikely events, declining to enforce it in respect of them. However, Butt v Long is not inconsistent with the view that a covenant in restraint of trade should be construed, in the case of ambiguity, in favour of the employee; that is to say, in favour of giving it a narrower rather than a wider operation [Butt v Long, 487]. [68] Construction of a restraint is informed by the factual matrix, and in particular the nature of the employer's business, and the employee's role in it. An agreement in restraint of trade is construed with reference to its subject matter, and descriptive words may be restricted in their operation by reference to the circumstances in which the parties contract. Thus restraints which at first sight are general in form, in prohibiting a former employee from offering to perform services for or soliciting the custom of the former employer's clients, have often been construed as relating only to those services or products which the employer had offered, and covenants prohibiting a former employee from dealing or transacting business with customers of the former employer have been construed to mean business of the same or a similar kind to that which had been carried on by the former employer [Lindner v Murdock's Garage, 635, 649; Mills v Dunham [1891] 1 Ch 576, 581, 586; Business Seating (Renovations) Ltd v Broad [1989] ICR 729, 735, (Millet J); G W Ploughman & Sons Ltd v Ash [1964] 1 WLR 568, 572; [1964] 2 All ER 10; McLaughlin Consultants v Boswell [1989] 30 IR 417, 419 (Bryson J); cf I F Asia-Pacific Pty Ltd v Galbally (2003) 59 IPR 43; [2003] VSC 192, [118]-[127]]."
Nor is there any dispute between the parties that the concept of "customer connection" to which Brereton J refers can be taken conveniently to have been explained by Meagher JA (with whom Campbell and Young JJA agreed) in Jardin and Jardim Investments Pty Ltd v Metcash Ltd and Metcash Trading Ltd [2011] NSWCA 409 at [95] and [97]: "[95] Expressions which describe the necessary relationship as one in which the employee is the "human face" of the employer do so to emphasise that the source of the influence must be the personal relationship which is likely to develop, or has developed, between the employee and customer as a result of dealings between them on behalf of the employer and its business. In Stenhouse Australia Ltd v Phillips [1973] 2 NSWLR 691; [1974] AC 391 at 400 the Privy Council emphasised the distinction between the use of the employee's personal skill or experience, against which the employer is not entitled to be protected, and the use of some advantage or asset inherent in the business which can properly be regarded as the employer's property which might legitimately be protected from appropriation by an employee for his or her own purposes. In Miles v Genesys Wealth Advisers Ltd , this Court adopted that statement of principle and described the relationship between a senior employee and customers with whom that employee had fostered close and productive relationships as being "to a substantial extent" the property of his employer notwithstanding that the relationship had also developed and been supported at least in part by the employee's own qualities of skill and experience: at [38], [41], [54], [55]. … [97] These statements are not, however, to be understood as requiring that the employee be proved to be in a position to control whether the customer remain with or leave the business. The employer is entitled to protection against the use of "personal knowledge of and influence over" its customers, which the employee might acquire in the course of his or her employment, so as to undermine its customer connections: Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 709; Lindner v Murdock's Garage (1950) 83 CLR 628 at 635, 636, 645, 647, 654. It is against the "possibility" of its business connection being adversely affected by the use of that "personal knowledge and influence" that the employer is entitled to be protected: Lindner v Murdock's Garage at 636, 645, 654. Latham CJ (dissenting) summarised the relevant principle as follows (at 636): "Where an employee is in a position which brings him into close and personal contact with the customers of a business in such a way that he may establish personal relations with them of such a character that if he leaves his employment he may be able to take away from his former employer some of his customers and thereby substantially affect the proprietary interest of that employer in the goodwill of his business, a covenant preventing him from accepting employment in a position in which he would be able to use to his own advantage and to the disadvantage of his former employer the knowledge of and intimacy with the customers which he obtained in the course of his employment should, in the absence of some other element which makes it invalid, be held to be valid.""

ANALYSIS

There is no dispute about the construction of the restraint of trade provisions on which the plaintiff relies. On the proper construction of the parties' contract, they were intended, inter alia, to prevent the defendant from working for Queensland Health's Payroll Portfolio section, in the provision of WorkBrain services, during the 12 months following termination of his employment with the plaintiff.
I do not accept, as the defendant contends, that the plaintiff must fail for want of an interest able reasonably to be protected by these restraint of trade provisions. The defendant may well have exercised considerable autonomy in the performance of duties owed to Queensland Health; but he did so as an employee of the plaintiff and in the provision of services he was contracted by the plaintiff to provide to Queensland Health. Independently of him, the plaintiff had regular contact with Queensland Health, giving rise to commercial goodwill vis-a-vis Queensland Health, which chooses to obtain services through consultants. That goodwill is and was at all material times a "protectable interest".
The nature of the plaintiff's business (essentially, the provision of IT personnel to clients) is also such that the plaintiff required, by contractual restraints, to protect itself against an employee who, following placement, might change his or her employer to cut out the plaintiff.
The fact that Queensland Health has routinely retained consultancy services through a variety of corporations - not limited to the plaintiff - does not deprive the plaintiff of "goodwill" capable of being protected by a reasonable post-employment contractual restraint of trade affecting the defendant as the employee through whom it provided services to Queensland Health.
The greatest potential weakness of the restraints relied upon by the plaintiff is their duration for 12 months: JD Heydon, The Restraint of Trade Doctrine (Lexis Nexis, Australia, 3rd ed, 2008), pages 163-165 and 168-171. Twelve months appears to be at the outer limits of what would be a restraint of reasonable duration.
The defendant's contract with Paxus Australia Pty Ltd includes a post-employment restraint for a term of only three months; but, as evidenced by statements made on behalf of Paxus Australia Ltd to the defendant during its negotiations with him (Exhibit P6, emails dated 15 September 2016), consultancy agreements in this area not uncommonly include a post-employment contractual restraint expressed to operate for 6-12 months.
Although the terms of the defendant's contract with the plaintiff changed from time to time, each of the documents evidencing their contract included a 12 months post-employment restraint of trade. The fact that the defendant voluntarily agreed to such a restraint, more than once, and expressly agreed that it was no more than what was reasonable to protect the plaintiff's legitimate interests, provides evidence in support of the reasonableness of the restraint: Russ Australia Pty Ltd v Benny [2006] NSWSC 1118 at [49].
Although by no means determinative, in the circumstances of this case, in an industry in which restraints of 6-12 months are not uncommon, the defendant's express agreement that a 12 month restraint was reasonable should not lightly be discounted.
In its factual context, I find that the restraint is reasonable and, accordingly, valid.
In making that finding, I notice that the restraint does not constrain the defendant's entitlement to provide his professional services to parties other than Queensland Health. I also take into account that the services which the defendant is qualified to provide require particular expertise, with commensurate remuneration; this is not a case of a unskilled worker, but a case of a highly-paid consultant whose services the Department chooses to acquire through corporations, known to it, responsible for procurement and employment of particular consultants.
In the circumstances in which the parties' dispute about annual leave entitlements arose, the defendant's allegation of non-payment of such entitlements cannot fairly bear upon the credit of Mr Hughes, or ground a discretionary bar asserted by the defendant (on the basis of "unclean hands") to the grant of a final injunction to the plaintiff. The plaintiff was not given reasonable notice of the defendant's allegation or a reasonable opportunity to counter it.
In formal terms, I reject the defendant's tender of a selection of payslips from the plaintiff (MFI D8) which, the defendant contends, evidence a failure to acknowledge the defendant's annual leave entitlements. If the payslips are otherwise admissible, I order (pursuant to section 135 of the Evidence Act 1995 NSW) that they not be admitted into evidence because their probative value is substantially outweighed by the danger that the evidence might be unfairly prejudicial to the plaintiff and misleading.
It was not contended for the defendant that any unperformed obligation of the plaintiff to provide annual leave entitlements to the defendant was, on the proper construction of the parties' contract, interdependent with the defendant's obligation to comply with his restraint undertaking.
Nor has it been contended that the plaintiff was otherwise in breach of any obligation owed to the defendant. He was peeved that the plaintiff did not secure for him the position with Queensland Health he was able to secure through Paxus Australia Pty Ltd; but he did not contend that a perceived failure of the plaintiff to advance his interests as well as he might have hoped constituted a breach of contract or the like. It provides no ground for a refusal to hold the defendant to his contract with the plaintiff.

CONCLUSION

Making allowance for the parties' submissions as to the form of any final injunctive relief to be granted to the plaintiff, I make the following orders: 1. ORDER that the interlocutory injunction granted to the plaintiff on 6 December 2016 be discharged. 2. In lieu of that injunction, ORDER that the defendant be restrained, up to and including 4 November 2017, from performing any services involving the use of WorkBrain software for the Payroll Portfolio section of the Queensland Department of Health. 3. ORDER that the Summons otherwise be dismissed.
I am not prepared to limit the injunction to which the plaintiff is entitled so as to permit the defendant to work within a particular "team" within the Payroll Portfolio section other than that within which he says he worked for the plaintiff. There is no sound reason for restriction of the restraint in that way. Throughout his employment by the plaintiff the defendant was engaged with Queensland Health as the plaintiff's client, not limited to the particular team (within the department) of which he was a member.
Prima facie, with costs following the event, the defendant should pay the plaintiff's costs of proceedings.
Counsel for the defendant seeks an opportunity (which I will allow) to submit that some allowance should be made in favour of the defendant for the plaintiff's abandonment of claims for relief at the final hearing.

Amendments 31 January 2017 - Insertion of "procurement and" in the last line of paragraph 36. 31 January 2017 - Insertion of "of" after "feature" in paragraph 12. Date altered to read 30 June in paragraph 16. "Campbell and Young JJ" altered to read "Campbell and Young JJA" in paragraph 26. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 31 January 2017

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