Supreme Court of NSW|1998-12-07|Before: Young J

Tyser Reinsurance Brokers Pty Ltd v Cooper Matter No 4318/98 [1998] NSWSC 689 (7 December 1998)

TYSER REINSURANCE BROKERS PTY LTD v NICHOLAS LESLIE COOPER

The Supreme Court of New South Wales Equity Division

The plaintiff was incorporated on 14 April 1994. Its business is that of a reinsurance broker. It is sixty per cent owned by Tyser & Co of London. Peter John Thompson, who became the plaintiff's managing director on its incorporation, negotiated the employment agreement with the defendant which was conveyed to Mr Cooper in a document outlining his terms of employment on 12 April 1994. The parties indicated that the actual employer would be a company that would be nominated in due course. The defendant came to work on 18 April 1994 as manager and the employer was the present plaintiff. On 1 January 1995 the defendant was appointed Executive Director of the plaintiff.

The contract of employment of 12 April 1994 had not contained any clause restraining activities after the employment ceased. However, a formal agreement was signed between the parties on 15 December 1994. This did contain a restriction on the use of confidential information and also a one year restriction on soliciting or enticing customers to terminate their business relationship with the plaintiff.

The second agreement was signed on 27 June 1996 in similar terms. The agreement of 1996 is peculiar in that the company named as the employer seems to have a different ACN to the company in the current employment agreement which in turn has the same name as the company in the second agreement but a different ACN. However, nothing really turns on this.

The third agreement is the one on which the plaintiff now sues, though it sues on an agreement which is partly written and partly oral. That agreement bears date 11 September 1997. Although the employer is named as Tyser WU Reinsurance Brokers Pty Ltd its ACN shows it is identical with the present plaintiff. Clause 11.1 is as follows:

The Employee shall not without the written consent of the Employer during the Restraint Period:

immediately preceeding [sic] the Disassociation Date and who was a client of

immediately preceeding [sic] the Disassociation date;

The clause incorporates various definitions which can be found in cl 1.1 of the document. There one can see that "clients" includes "customers and potential clients and customers"; "'Group' means each of the Employer and, if any, all of its Related Bodies Corporate" (that expression is said to have the same meaning as in the Corporations Law); "'Restricted Service' means any service concerning or relating to the insurance requirements of the client", and then there is a definition of "Restraint Period":

"'Restraint Period' means the periods commencing

on the Disassociation Date and expiring one (1) year, two (2) years or three (3) years immediately following such date, to the intent that;

The plaintiff seeks to rectify the agreement either by deleting the words "Restraint Capacity" from cl 11.1 or alternatively, by inserting the following definition into

"'Restraint Capacity' means engaged in, be concerned with, or interested in, directly or indirectly, as an adviser, consultant, partner, shareholder, principal, agent, director, manager, servant, employee or beneficiary or in any other capacity whatsoever of any company, body corporate, trust, partnership or other organisation whatsoever or as a sole trader."

The plaintiff says that since 10 July 1998 when the defendant left its employ, the defendant has canvassed, solicited and enticed away clients of the plaintiff.

I should note that alternatively, though this did not feature very much in the presentation before me, the plaintiff sues on a Termination Agreement. This was an agreement signed between the parties on 7 July 1998 whereby they agreed that the defendant would be paid a bonus, the first instalment of $10,000 in cash, on the basis that he would observe the restrictions in his employment agreement. Really this does not take the matter much further because if the defendant was already bound to do that, the second agreement is not worth very much and if it merely re-published the employment restrictions one has still got to construe what those restrictions are by looking at the employment contract.

It would seem plain that the defendant, after he left the plaintiff's employ, took up a position with an organisation known as AIRS whose full title is Australian Independent Reinsurance Services. The exact status of the defendant in that organisation is unclear.

The plaintiff had only four principal insurance clients. Those were Century Insurance Finances, which seems to be based in Saipan, State Insurance Office of New Zealand, Pacific Indemnity Insurance and Australian Family Insurance. The way in which the reinsurance business was conducted was described as being treaty business. It was described in evidence as an annual contract of reinsurance covering part or all of a client's portfolio generally providing the automatic existence of reinsurance within agreed limits. Each of the four named principal clients did treaty business with the plaintiff, the treaties being due for renewal respectively on 31 December 2000, 30 June 1999, 1 June 1999 and 31 December 1998.

The evidence shows that since Mr Cooper left the plaintiff's employ either he or other officers of AIRS, have been in contact with at least Century Insurance and State Insurance Office of New Zealand. There have been suggestions that those companies should review the way in which their policies operate as to possible gaps in cover. In the witness box Mr Cooper indicated that if not restrained from doing so he had in mind that AIRS would be able to enter into commission-sharing arrangements with Tyser & Co London to deal with those companies' requirements.

From the evidence of Mr Cooper in the witness box and from his colleagues' communications with Century Insurance and State Insurance AIRS indicated that the probabilities would be that the plaintiff would not be in the reinsurance marketplace for very much longer. The plaintiff says that this was canvassing, soliciting and enticing away customers. The defendant says that that enticement is only perfected when the customer actually leaves the group of clients of the plaintiff and that has not yet happened; that there was no soliciting or canvassing, though it may be that within clause 11.1(c) there has been counselling, procurement or the assistance of AIRS to do a prohibited act, but that is not what is alleged against the defendant.

The case was commenced on 16 October 1998 and has been heard as a matter of urgency. That has meant that to a degree both sets of solicitors have been confined by pressure of time but despite that, and despite the fact that we have been able to finish the case in one day, it has been adequately presented and adequately argued by Ms Gleeson for the plaintiff and Mr D Robinson for the defendant.

Various issues arise, though it is probably not necessary to deal in detail with all of them. I will list these then try to answer them in order.

3. Is the restraint clause enforceable under the general law?

4. Does s 4(1) of the Restraints of Trade Act 1976 assist the plaintiff?

1. In my view the rectification claim must fail. There is

no evidence so far as the claim to include a definition of "Restraint Capacity" is concerned that there was ever any common mistake to the effect that the words which I have set out above should be included in the contract. One can see that the drafter may well have had in mind a definition of "Restraint Capacity", but there is no evidence as to what that definition was in the mind of that person or whether it was ever communicated to the defendant.

What appears to have happened is what regrettably happens in many cases - that companies have on hand a pro forma agreement; no one in the company really understands it; the employee is asked to sign it, he or she has a vague idea of what it says and signs it. There is no material to suggest that anything other than that happened on this occasion. There is no evidence of any common mistake as to the definition.

The other possibility is that the words have been inserted into cl 11.1 in error. There is some evidence that both parties intended that there would be a restriction. It is not suggested that there should be an overriding restriction but it was to be a restriction within limits. The words "Restraint Capacity" do not appear to have been added by mistake because not only do they appear in 11.1(a) but they are also in 11.1(b) which tends to suggest that the words were used deliberately and with a purpose.

Accordingly, I do not find that there was any common mistake in inserting those words and the rectification suit must fail.

2. Clause 11.1 is an extremely difficult clause to construe. Principally this is because the drafter has used wide words in the definition section. This, generally speaking, is a good habit, but when one gets to a restraint of trade clause which is void unless it is a reasonable restraint, then the habit of defining things widely becomes embarrassing.

The basic problems concern clients of the group and the words "Restricted Service" and "Restraint Period". "Client of the Group" is very widely defined as including potential clients of related companies. Those related companies may be scattered throughout the world. Certainly they may be found in England. There is a limitation in the fact that a service has to be provided by the employee within three years of his leaving the company, but the service can be anything concerning or relating to the insurance requirements of the client, so that one could have an inquiry from an associate of Tyser & Co of London on a very small matter which would then lead to a restraint for three years on the employee who dealt with it in Sydney. Again, the restraint period is defined in what has been called in argument "cascading drafting", but there are very real difficulties with a clause in that form.

The restraint period should not differ depending on what a court should hold. First, it is not a reasonable way of letting an employee know what are the requirements that bind him or her; secondly, there is great difficulty if there is an appeal against the holding, both pending the appeal and, perhaps, afterwards.

3. As Mr Robinson pointed out in his submission, what happens if within one year the period is held to be invalid? There seems to be no mechanism for substituting a fresh period.

There does not appear to be, other than the application of s 4(1) of the Restraints of Trade Act 1976, a way of reading down the section just by the process of construction.

However, Mr Robinson says that there is an even more basic problem with clause 11.1(a). He says that whilst there are cases such as those cited by Ms Gleeson which show that a meaningless provision which has no apparent significance can be disregarded (see eg Nicolene Limited v Simmonds [1953] 1 QB 543; Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 and Watson v Phipps (1985) 60 ALJR 1 (PC)), it is a completely different story when the words do have apparent significance. He says, for the reasons I have already mentioned when dealing with rectification, that the words do have significance because the drafter has used them twice with an obvious intention of limiting or perhaps extending the normal meaning of the words which follow. Accordingly, there is a situation where the drafter has omitted words which are necessary to understand the document and we do not know what those words are either by a process of rectification or construction. The court cannot make a new contract for the parties by filling in the blanks. Accordingly, the agreement is void for uncertainty.

Although courts do try as hard as they can to avoid the answer that a commercial contract entered into by two parties intended to be bound is a solemn farce and is void for uncertainty, sometimes that solution is the only one left. Although I have tried to find ways out of that solution in the instant case, I cannot find one. Accordingly, in my view the clause is void for uncertainty.

4. Section 4(1) of the Restraints of Trade Act 1976 can only operate if the sole reason why the clause is void is because it is an unreasonable restraint of trade on the basis that it is against public policy. The section does not apply where the clause is void for uncertainty: Corporate Express Australia Ltd v Swift-McNair (Young J, 2 October 1998, unreported).

5. Accordingly, the result of the case is that the proceedings must be dismissed with costs.

Tyser Reinsurance Brokers Pty Ltd v Cooper Matter No 4318/98 [1998] NSWSC 689

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Tyser Reinsurance Brokers Pty Ltd v Cooper Matter No 4318/98 [1998] NSWSC 689 (7 December 1998)

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