Supreme Court of NSW|1998-12-04|Before: Young J

Tv Shopping Network Ltd v Scutt and Anor Matter No 4389/98 [1998] NSWSC 705 (4 December 1998)

TV SHOPPING NETWORK LTD v JOHN ALAN SCUTT & ANOR

The Supreme Court of New South Wales Equity Division

The first defendant was employed by the plaintiff on 8 September 1997. On 13 November 1997 he was appointed a director of the plaintiff and various associated entities. The second defendant is a company that is associated with the first defendant and is, according to the evidence, intended by the first defendant to be a vehicle for a business to be carried on by him and investors that he might attract.

Just prior to the employment the first defendant signed an employment agreement with the plaintiff. Clauses 5 and 10 of that employment agreement are as follows:

By virtue of your employment you may become aware of information relating to the business or affairs of TVSN, its staff and its customers including, but not limited to, customer lists, trade secrets, customer details, sales and marketing information, and financial information, ("Confidential Information").

Confidential Information remains the sole property of TVSN.

Except in the proper course of your duties, you may not ... either during or after your employment with TVSN, directly or indirectly disclose any Confidential Information to any person or use Confidential Information for any unauthorised purpose.

Should you voluntarily leave the service of TVSN, you agree not to work in any capacity for an organisation which could be deemed as a competitive business to TVSN for a period of six (6) months."

The plaintiff, though an Australian company, appears to be based in Hong Kong. It is a closely held corporation of which approximately sixty-five percent of the shares are owned by a corporation known as The Search Group and thirty-five percent by Prudential Asset Management Asia Pty Ltd, known as PAMA.

The plaintiff's business is direct selling, mainly using the medium of cable television to display and present information about products which it has already purchased and has stored in its warehouse, to the ultimate consumer. The presentation on television informs viewers about the product and provides a telephone number should they wish to purchase that item. When this number is 'phoned, the operator notes the customer's name, address, sex and postcode, proposed method of payment and, of course, the product required.

The plaintiff made considerable losses for the last two financial years and on 2 July 1998 it went into voluntary administration. Although I do not have full details, it seems that the creditors agreed by deed of arrangement to allow the company to continue trading with trade creditors, taking a slight discount on their debts, and allowed some onerous contracts to be terminated.

In May this year the plaintiff decided that it would alter the geographical areas of its activities. Shortly before this it had parted company with its former chief executive officer. In May the plaintiff decided that it would confine its activities to China and Australia. Before that it was also involved in Japan, Singapore and certain other countries.

The first defendant was appointed as the managing director of its Asia Pacific Division on 9 February 1998 while remaining chief financial officer of the plaintiff. After the departure of the former chief executive officer it is clear that the first defendant thought that he would have a good chance of succeeding to the office of chief executive officer.

In early May 1998 the first defendant spoke to Nicholas Prior, the acting chief executive officer, and president of The Search Group. Mr Scutt was informed by Mr Prior at that stage that the plaintiff was pulling out of all areas, except China and Australia.

On about 28 May 1998 Michael McNabb was appointed chief executive officer of the plaintiff. At a meeting in Hong Kong on about this day with Messrs Prior and McNabb it was made clear to the first defendant that his role in the plaintiff company would change considerably. The first defendant's response was:

"I can't work under those conditions. I feel I have no choice but to resign."

About an hour later a resignation agreement was signed with Messrs Prior and McNabb. It provided that the first defendant would resign from all offices within the TVSN Group effective 31 May 1998, and that the notice period of three months under the employment contract would be worked out, the confidentiality and non-compete clauses remained in force and that the staff would be told of the change.

During the period when he was, to use a colloquial expression, working out his notice, the first defendant was asked to investigate opportunities in the Middle East, Japan and Indonesia. He performed these tasks and in the course of doing so made reports to the plaintiff or one of its associates.

The first defendant actually remained a director of one of the subsidiary companies, which can be referred to as TVSN (BVI). On everybody's account the first defendant remained an employee until at least 31 August. His last day of actual service was 9 September 1998. There was some discussion as to whether the first defendant's employment ceased before his period of notice expired and what was the significance of him working for an extra 8 or 9 days. Most of these issues need not be considered. They were similar to those decided by Windeyer, J in Austen & Partners Pty Ltd v Spencer - 1 December 1998, unreported, which I would follow.

On 9 September 1998 the parties entered into a deed of release. That deed has some significance in this case, and so I need to refer to it and an associated letter under the hand of Mr Daly, the general manager, human resources, of the same day addressed to Mr Scutt.

The deed of release recited that the first defendant was employed by TVSN as managing director and chief financial officer, that TVSN had terminated the employment effective 31 August 1998, and that without any admission the parties had agreed to the operative provisions deed. Those provisions need not be set out in full but they involve a termination date, a redundancy payment, a release by Mr Scutt and a provision for non disclosure. Mr Daly's covering letter included a series of sheets of paper which referred to the last day of employment being 31 August 1998, and there being a redundancy payment of a certain amount and an accompanying sheet again referring to a redundancy payment, the document being headed "Statement of Termination Calculation: Redundancy".

It should be noted that the evidence makes it quite clear that between the end of May and 8 September 1998 both the first defendant, on the one hand, and Messrs Prior and McNabb, on the other hand, had a common desire that the first defendant should remain with the plaintiff company. The work that the first defendant did in his notice period was aimed at setting up a cooperative venture in which the plaintiff would have, say, ninety percent, and the first defendant ten percent to go into the Middle East, Indonesia and Japan with the same sort of business as the plaintiff was then presently carrying out.

The evidence shows that both Mr McNabb and Mr Scutt believed that there was every chance that the plaintiff would adopt the project. Although The Search Group encouraged the project, PAMA did not, and when the board had to make a decision about it, which it did on 4 September 1998, the board turned the proposal down.

This was conveyed to Mr Scutt, who was not at all pleased. The evidence tends to suggest that Mr Scutt thought that there was just nowhere for him to go in the company as result of that decision, and that Mr McNabb tended to agree, though not all the evidence is along the same line.

However, as a matter of objective fact, it would appear to me that as the first defendant had effectively been downgraded in May, that his previous team of executives who reported to him would no longer be reporting to him, that the proposal which was to keep him with the company had been rejected by the board, there was in fact nowhere else for him to go and he really had to fall on his sword.

Whilst the first defendant was working out his notice, he did turn his mind to various other employment possibilities. One possibility was that he should set up his own company, which would operate a business along the same line as the plaintiff, and he was naive enough to put some of the details of this plan on to the computer which had been entrusted to him by the plaintiff.

In October the employee who was next allocated the computer found the document and this prompted the plaintiff and its executives to be extremely suspicious that the first defendant was about to go into business in competition with it, in defiance to what they would have seen as his obligations as a good company man and his fiduciary and contractual obligations.

I should note that this Court would probably try about fifty of these sorts of cases every year and it is common to see that feelings run very high. There are feelings of betrayal obviously on both sides, and these fuel the litigation into issues that really cannot stand up in fact or in law.

Looking at the evidence, it would seem that that is the situation here. The plaintiff very, very, very strongly feels that it has been betrayed by the first defendant, who is going to use its property for his own benefit after he has left. The first defendant feels that he was virtually forced out of the plaintiff, not given the opportunities he expected because of the attitude of PAMA, and that he has been badly done by.

I can understand all those feelings and I can understand how they focus the parties' attention on parts of the litigation that are not as significant legally as other parts, but my job is merely to referee the dispute according to law, and to make the order that needs to be made in accordance with the agreement that the parties have made, affected as it is by general principles of law.

Another common problem in this sort of matter is that unless cases are decided speedily justice cannot be done. Because of this the case was fixed for hearing about two weeks ago, it was tried last week and the addresses were finished off at 7am this morning. That means the judge does not have the same time as he or she often has to sit down and weigh all the principles involved at leisure, but must make a speedy decision. The judge also must appreciate, as I do, that when solicitors and counsel have to prepare and present a case in the abbreviated period of time, there is also great pressure on them and so one should not expect as many "i's" to be dotted and "t's" to be crossed as perhaps would happen in more leisurely litigation.

There seemed to me at one stage to be about sixteen issues in this case. However, in his closing address Mr Foster SC, who appeared with Mr M Green for the defendants, said that there were only two issues. Mr Menzies QC, who appear with Mr M Christie for the plaintiff, in reply agreed that this was so. Accordingly, I need only deal with those two issues.

I should note in particular that there is no claim for damages or equitable compensation or for an order under

s 1317HD of the Corporations Law. Effectively the plaintiff only seeks relief by way of injunction, either at general law or under s 1324 of the Corporations Law.

As to the latter, I should note that Mr Menzies QC relied to some extent on a failure by the first defendant to carry out what is expected of him under s 232 of the Corporations Law, either in his role as a director or as a manager, who is an officer within the meaning of that section. However, in view of what the Court of Appeal said in Castlereagh Motels Ltd v Davies-Roe (1966) 67 SR (NSW) 279, and what I said about s 1234 of the Corporations Law in Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128 at 136-7, and the non-reliance on s 1317HD of the Corporations Law, the material raised as to s 232 must lead up a blind alley and there is no utility in exploring it further.

Mr Menzies QC spent a considerable part of his address attacking the credibility of the first defendant. In the event, it does not matter because I do not consider that there is any aspect of this case where it is critical to work out whether Mr McNabb, on the one part, or Mr Scutt, on the other part, is telling the truth.

I did, however, as is my duty, observe each witness carefully. Although two or three of the plaintiff's witnesses gave disappointing performances, I thought that Mr McNabb, the only witness for the plaintiff whose evidence needs to be evaluated, was a very careful and intelligent witness, who gave his evidence well, and the material that he gave was as good as to quality as could be expected.

Mr Foster SC says that Mr Prior was not called, and there are some parts of Mr McNabb's evidence which appear to be unlikely or to cut across what Mr Prior wrote, and that is a fair comment. On the other hand, one does not expect perfection in every witness.

Likewise, Mr Scutt presented well. I think Mr Menzies QC is quite correct that Mr Scutt's evidence was contradicted by Mr Fuline's evidence, and this did affect his credibility to a degree, but not so much as I would discard him generally as a reliable witness.

1. Should an injunction be granted either under the general law or under s 1324 of the Corporations Law to restrain the first defendant from competing with the plaintiff until the end of February 1999? and

2. Should such an injunction be granted in respect of the alleged breach of confidence?

I will deal with each issue in turn. In respect of the first issue there are some sub-issues.

1. The focus is on cl 10 of the employment agreement.

I have already set this out earlier in these reasons. Mr Foster SC says that when one looks at the words used they are virtually meaningless. In particular they pick on the word "deemed" and point to the fact that in one breath the drafter has prohibited work for an organisation, yet in another breath he or she has mentioned competitive business rather than competitive organisation.

It is always very difficult to make out a submission that a commercial contract is void for uncertainty. The High Court in the oft quoted passage in Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429, makes that abundantly clear.

The court must, if at all possible, give meaning to the words which commercial people have used because it must assume that they did not take part in a solemn farce. However, it should be noted that in connection with this type of agreement often, as a matter of commercial reality, the employer realises that the agreement will be hard to enforce and often puts provisions in this sort of agreement in terrorem.

Again, one must be careful not to be too pedantic in construing this sort of agreement because although there is a public interest to make sure that there are not unreasonable restraints of trade, there is also a public interest in making sure that employers and employees can treat each other confidently and without fear of betrayal.

What then does cl 10 mean? So far as "deemed" is concerned Mr Foster SC says the problem is deemed by whom? There is also the problem that "deemed" is rather a weasel word.

"Deemed" is part of the word "doom" which is an Anglo Saxon word: "doom" meant judgment. So we see in legal history the Dooms of King Aethelbert or we refer to "doomsday" which means judgment day. The fact that doomsday now has the connotation of terror and destruction merely reflects humanity's judgment on itself as sinful, but "doom" means judgment and ordinarily "deem" means judge. It is used in this sense in some of the cases such as R v Governor of Brixton Prison; Ex parte Soblen [1963] 2 QB 243, 315. It is also true that the word sometimes means that a person who has not made the grade should be considered for all purposes as if he or she has made it, but that is not the sense in which it is used in cl 10.

The next problem is organisation/business. Cases in this area, such as Arnott's Ltd v Bourke (1998) 41 IPR 172 show the difficulties in equating organisations with business because an organisation may have a number of businesses which it runs. It is not at all unusual in our community for banks to run development companies, for insurance companies to run nursing homes, and what have you, so that we here have a prohibition on working for an organisation, which organisation could be deemed a competitive business.

That really does not make sense literally. It should also be observed that it is not only that it is to be deemed or judged as a competitive business, but it could be deemed or judged as a competitive business, which makes things worse.

Mr Menzies QC acknowledged the difficulties, and in discussion I think we got to the stage where the best translation for the plaintiff was something like this:

"The employee is not to work in any capacity for an organisation which could be judged by any reasonable person as carrying on a competing business to TVSN".

However, even if this best translation were used, in my view the covenant would be too wide.

There is no need in these reasons to repeat the well-settled passages of the law that, generally speaking, all covenants in restraint of trade are void and the only ones that are saved are those which are reasonable in all the circumstances.

Under the general law, apart from cases where the blue pencil rule can be applied, the fact that a covenant is expressed too widely will destroy the whole covenant, even though what the defendant is doing is clearly something which could have been prohibited had the right words been used. It was for that reason that the Restraints of Trade Act 1976 was introduced. But in this case there is no reliance, nor could there be, by the plaintiff on s 4(1) of that Act, so that one must look at the matter under the general law.

Even on the best translation, the words "in any capacity" must destroy the covenant as being reasonable. What would it matter if Mr Scutt took a job at the Woolworths Marble Bar branch as a checkout operator, even though one of the businesses run by Woolworths might be a competitive business to TVSN.

The question of the word "capacity" destroying a covenant was considered at length by the Full Supreme Court of South Australia in Rentokil Pty Ltd v Lee [1995] SASC 5318; (1995) 66 SASR 301. The Chief Justice obviously thought the word, even with a special definition made the covenant void. He was a dissenter, but Debelle J, who was one of the majority, considered that unless there was a restrictive definition, the word "capacity" would have destroyed the covenant; see particularly pp 338-339.

Accordingly, in my view the covenant is too wide, it is an unreasonable restraint of trade and is unenforceable.

Because of this conclusion it is not necessary to consider the cross-claim under s 4(3) of the Restraints of Trade Act. However, prima facie, in view of the evidence Mr Daly gave under cross-examination at p 35 of the transcript, this would be a classic case for applying that section or at least considering its application, as the employer just got the employee to sign a standard form or else he would not have been employed, rather than directing attention to the circumstances of the employment.

However, if I am wrong I should consider the next matter and that is what does "voluntarily leave the service of TVSN" mean and did that happen in this case?

Mr Foster SC says that the plaintiff must show that the first defendant, as a matter of free consent without duress, deliberately and consciously quit his own employment. This appeared to be a little extravagant and Mr Foster SC, under a bit of pressure, deleted the word "free".

However, it is clear that a person may give a valid consent and may act voluntarily, even though there is some pressure applied to him or her. Indeed, this often happens. So in US v Davis [1973] USCA9 361; 482 F (2d) 893, 9134 (1973), where a person could either be security checked at an airport or not fly, it was held that going through a security check was voluntary. However, it is quite clear that free choice is an element of voluntary choice; see Taylor v Stapley [1954] HCA 12; (1954) 90 CLR 1, 9 (a case decided in quite a different context).

Accordingly, it does not seem to me to destroy the concept of an employee leaving voluntarily that there was some pressure on him to do so, so long as the pressure does not get beyond a point which is impossible to define with precision.

There has been a great deal of debate before me as to whether and when Mr Scutt resigned, when his resignation became effective, what happened during the period of notice, whether there was a waiver by the plaintiff, or a new contract of employment, but one does not approach this commercial document as a matter of technicality, but of business common sense.

The scenario in May was that the first defendant was told that he was being virtually downgraded and a self-respecting executive would not take that lightly. Indeed, a self-respecting executive might even be expected to resign rather than take a lower position.

It must always be remembered in ordinary employment law it is no answer to a claim for wrongful dismissal that a person was offered a lower office.

Then there was the three months during which both parties intended that Mr Scutt would remain with the plaintiff in a different role. That was thoroughly explored. It was put to the board expectantly, yet on 4 September the board knocked it back, and by 8 September, I accept the situation was that there was just no position for Mr Scutt in the company and, accordingly, he left. It seems to me in those circumstances there was not a voluntary leaving of the position of employment.

However, if I am wrong in that approach and one does look at it technically the deed of release cannot be cast aside as simply as Mr Menzies QC seeks to do it.

Deeds are the most solemn formal act that parties can enter into and the law is that they mean what they say. Should this action have been an action on the deed, no-one would have been allowed to deny any statement of fact in it. As the action is not on the deed, as Mr Foster SC said, it is not, strictly speaking, a case of estoppel by deed, but the fact that the deed was made and what it says is very strong evidence to support the truth of what is said. See Carpenter v Buller [1841] EngR 552; (1841) 8 M & W 209; 151 ER 1013.

As I have previously said, the deed expressly states more than once that the employment terminated as a result of an action by TVSN, and that the first defendant had become redundant.

Thus, although I have tried to look at the matter realistically, whether one looks at it realistically or pedantically, the broad brush or technically, one gets to the same result that the plaintiff cannot succeed on the first issue.

The case originally proceeded on the basis that there were four classes of information which were confidential. It was clear during the case that some of these just could not be established. A lot of time and expense went into compiling a customer profile list and some matters emerged from that list which were commercially sensitive, but other information, such as arose in evidence that a person who buys computing products in Orbost, Victoria is 99 percent sure to be female, and to spend less than $50, having seen the product on cable TV, would not only not be confidential information but it would really be a waste of time absorbing it.

Accordingly, when the chips were down the only material that was put up as being confidential information was the information that Mr Scutt obtained in his tour to the Middle East, Indonesia and Japan during the period of his notice. That material investigated how it could be that the service provided by TVSN could extend into those areas and how joint ventures could be operated in those countries.

Is that then confidential information? Almost all information is useful for some purposes, but that of itself does not make it confidential. The standard test of what is confidential information comes from what was said by Megarry J in Coco v A N Clark (Engineers) Ltd (1968) 1A IPR 587, 590. His Lordship said that ordinarily one looks for three elements: (i) that the information imparted a confidence; (ii) that it was imparted in circumstances importing an obligation of confidence, and that it was then necessary to prove (iii), that there was a threat to breach the confidence.

A lot of what employees absorb during the course of their employment is very useful information and gives them a greater capacity to be employed. This information, insofar as it is know-how or general business skills, becomes part of the property of the employee and it is not a matter which the employer can restrain the employee from using. Examples of this type of knowledge are given in Printers & Finishers Ltd v Holloway [1965] 1 WLR 1 at 6.

In the instant case Mr Foster SC says that the information is not confidential within the Coco test, or even within the definition in the document. He says that the information was gathered on the trip, reports were made to the plaintiff, but the plaintiff had decided to confine its business to (a) Australia and (b) China and so it did not consider that it needed the information at all, nor did it need the first defendant to employ the information in its capacity; it has no current plans for the Middle East, Japan, Indonesia or Thailand, and that the information that was collected would be information which would date quickly and which any businessman in the industry would be able to think of without having too much intelligence. All that it really amounts to, said Mr Foster SC, is that Mr Scutt knows who the prospective joint venture partners may be, that joint venturing is the way to go in that type of business and that it requires a percentage spilt, which he said was something which any businessman in the industry would think of, and it was bumf rather than confidential information. Whilst not quite agreeing with that last statement, I do agree this is not the sort of business information that warrants protection by the court.

Even if I had come to a conclusion that some protection should be given, in view of the fact that no monetary compensation is being sought and that apart from the confidential information element the clause runs out in February 1999, it is doubtful whether the court would, in any event, have granted the injunctive orders that the plaintiff seeks; see Riteway Express Pty Ltd v Clayton (1987) 10 NSWLR 238.

I will hear counsel on costs, if they wish to be heard, but otherwise the proceedings should be dismissed.

I will order that the confidential exhibits be returned forthwith to the persons presenting them, so that there can be no risk of disclosure to an unauthorised person, and I think the other exhibits can remain for the time being.

On the question of costs, Mr Christie has put that although the first defendant has been successful he should not be entitled to all his costs or, indeed, any of his costs on the basis that his conduct brought about the litigation.

Costs under s 76 of the Supreme Court Act 1970 are discretionary. That discretion is the discretion given to a collegiate court and must be exercised in accordance with the guidelines that have been laid down from time to time. One of the guidelines is that it is the case that a successful party may be deprived of the whole or part of his or her costs if there has been misconduct by the successful party which relates to the litigation or the circumstances leading up to the litigation: Oshlack v Richmond River Council [1998] HCA 11; (1998) 72 ALJR 578, 592.

Mr Christie urges that the present is such a case. He says that the material found on the computer and Mr Scutt's lack of being forthright and open about the matter has fuelled the plaintiff's suspicion and invited the litigation. He particularly relies on a decision of White Property Developments Ltd v Richmond Growth Pty Ltd (Federal Court of Australia, Madgwick J, 23 March 1998, unreported) which was recently affirmed by the Full Court of the Federal Court consisting of Wilcox, Tamberlin and Sackville JJ.

Having considered the leading English cases and the Australian cases as noted in vol 40 of the 3rd ed of the Australian Digest in para [575], it seems to me that cases in this area fall into three categories; one, where the successful party has been guilty of misleading conduct; two, where an administrative authority has failed in its duty and led the unsuccessful party to make unwarranted assumptions; and three, where the conduct led to the belief that the cause of action existed.

The case before Madgwick J was primarily in the first class, although I agree with Mr Christie it also partly comes within the third class. The present case is clearly within the third class.

It seems to me that the modern guideline is that the conduct in inviting the cause of action must really be the prime motive in bringing the litigation, and when, as here, there was ill feeling and suspicion which was fuelled by the computer incident and the lack of the first defendant's forthright co-operation, I do not think that the case quite gets as far as to justify me from depriving the successful first defendant of his costs. Accordingly, the plaintiff must pay the defendants' costs of the proceedings.

Tv Shopping Network Ltd v Scutt and Anor Matter No 4389/98 [1998] NSWSC 705

At a glance

Court

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Judgment (88 paragraphs)

Tv Shopping Network Ltd v Scutt and Anor Matter No 4389/98 [1998] NSWSC 705 (4 December 1998)

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Legislation Cited (4)

Cases Cited (7)