AustCorp Consulting Pty Limited v Callaghan

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FEDERAL COURT OF AUSTRALIA

AustCorp Consulting Pty Limited v Callaghan [2023] FCA 1228   

File number: NSD 139 of 2023
Judgment of: YATES J
Date of judgment: 16 October 2023
Catchwords: PRACTICE AND PROCEDURE – application for review of decision of registrar granting preliminary discovery pursuant to r 7.23 Federal Court Rules 2011 (Cth) – whether evidence demonstrated reasonable belief of prospective applicant that they may have a right to obtain relief – whether prospective applicant made reasonable inquiries with a view to obtaining sufficient information to decide whether to start proceeding – whether applicant has demonstrated a reasonable belief in respect of documents – whether preliminary discovery would allow prospective applicant access to confidential information of commercial benefit to the prospective respondents’ expense
Legislation:

Corporations Act 2001 (Cth) s 183

Federal Court of Australia Act 1976 (Cth) s 35A

Federal Court Rules 2011 (Cth) r 7.23

Cases cited:

Barrett v Ecco Personnel Pty Ltd [1998] NSWCA 30

GDP Group Pty Ltd v Saye [2022] FCA 688

George v Rockett [1990] HCA 26; (1990) 170 CLR 104

Glowatzky v Insultech Group Pty Ltd (1997) 39 IPR 215

Paxus Services Ltd v People Bank Pty Ltd [1990] FCA 500; (1990) 99 ALR 728

Pfizer Ireland Pharmaceuticals v Samsung Bioepis AU Pty Ltd [2017] FCAFC 193; (2017) 257 FCR 62

Quanta Software International Pty Ltd v Computer Management Services Pty Ltd [2000] FCA 969; (2000) 175 ALR 536

Reeve v Aqualast Pty Ltd [2012] FCA 679

St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360; (2004) 211 ALR 147

Stacks Taree v Marshall (No 2) [2010] NSWSC 77

Division: General Division
Registry: New South Wales
National Practice Area: Commercial and Corporations
Sub-area: Commercial Contracts, Banking, Finance and Insurance
Number of paragraphs: 118
Date of hearing: 28 August 2023
Counsel for the Prospective Applicant: Mr S Meehan
Solicitor for the Prospective Applicant: Gadens Lawyers
Counsel for the Prospective Respondents: Mr P Boncardo
Solicitor for the Prospective Respondents: Segelov Taylor Lawyers

ORDERS

NSD 139 of 2023
BETWEEN:

AUSTCORP CONSULTING PTY LIMITED

Prospective Applicant
AND:

MEGAN CALLAGHAN

First Prospective Respondent

LEAD GROUP CONSULTING PTY LTD (ACN 632 022 274)

Second Prospective Respondent

ORDER MADE BY:

YATES J

DATE OF ORDER:

16 OCTOBER 2023

THE COURT ORDERS THAT:

1.Within 10 days, the parties bring in agreed orders giving effect to these reasons.

2.If agreement on the form of the orders to be made cannot be reached, the parties are to inform the Associate to Yates J of that fact, whereupon the matter will be listed for further hearing on that question.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.


REASONS FOR JUDGMENT

YATES J:

INTRODUCTION

  1. On 25 May 2023, a Registrar of the Court made an order on the application of the prospective applicant, AustCorp Consulting Pty Ltd (AustCorp), that the prospective respondents, Megan Callaghan and Lead Group Consulting Pty Ltd (Lead Group), give discovery of certain…

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Details
Case
[2023] FCA 1228
Decision Date

CaseChat Overview and Summary

The case of AustCorp Consulting Pty Limited v Callaghan involved an application by AustCorp for review of a decision by the registrar that granted preliminary discovery. The primary concern was whether AustCorp had a reasonable belief that it might have a right to obtain relief against Ms Callaghan and Lead Manager, and whether AustCorp had conducted reasonable inquiries to obtain sufficient information to determine whether to commence proceedings. The court was required to determine if the evidence demonstrated that AustCorp had a reasonable belief that they might have a right to obtain relief against Ms Callaghan and Lead Manager, and whether AustCorp had made reasonable inquiries to obtain sufficient information to decide whether to start proceedings.

The court found that AustCorp had a reasonable belief that it might have a right to obtain relief against Ms Callaghan and Lead Manager. The evidence supported the belief that Ms Callaghan had breached her employment agreement and fiduciary duty, and that Lead Manager may have been involved in obtaining documents through Ms Callaghan. The court also found that AustCorp had made reasonable inquiries, considering the nature of the inquiry and the potential repercussions of directly interrogating key clients. The court accepted that AustCorp's inquiries were reasonable given the circumstances and that further inquiries were not necessarily required.

In conclusion, the court granted the application for review and held that AustCorp had satisfied the requirements under rule 7.23. The parties were required to bring in agreed orders within 10 days, or the matter would be listed for further hearing if agreement could not be reached. The decision underscored the importance of balancing the need for preliminary discovery with the protection of confidential information and the commercial interests of the parties involved.

Orders

Orders of the court

1. Within 10 days, the parties bring in agreed orders giving effect to these reasons.

2. If agreement on the form of the orders to be made cannot be reached, the parties are to inform the Associate to Yates J of that fact, whereupon the matter will be listed for further hearing on that question.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

The prospective defendants rely on two affidavits made by Adrian Byra (who is described as a principal of Lead Group) on 27 April 2023 and 21 August 2023 (16 paragraphs), and one affidavit made by Ms Callaghan on 26 April 2023.BACKGROUND AustCorp is a specialist recruitment business which services its clients by sourcing and providing candidates for recruitment, whether by way of permanent employment or under “labour hire”, in different industry sectors. Its business is divided into specialist recruitment divisions, one of which is Nursing and Aged Care. This division is AustCorp’s largest portfolio based on revenue and profit. AustCorp employs recruitment consultants who act as intermediaries between AustCorp’s clients and the candidates seeking placement with those clients. AustCorp employs (what Mr Harrison called) “360 recruitment consultants”, meaning consultants that have knowledge of the full “briefing lifecyle” with respect to the engagement of appropriate candidates for a particular client. Mr Harrison’s evidence is that recruitment consultants with experience in a particular industry can provide a competitive advantage to their employer where they have client relationships and knowledge of clients’ business requirements. Ms Callaghan commenced employment with AustCorp under an Employment Agreement in the form of a letter dated 2 September 2019. She was employed in the position of Senior Consultant in AustCorp’s Nursing and Aged Care Division. Ms Callaghan had no prior experience working in the Australian aged care sector prior to commencing this employment. The Employment Agreement stated: …In carrying out your duties under this agreement, you are expected to develop good professional relationships with clients, potential clients and candidates. In developing close contacts with clients and potential clients, you will have an intimate knowledge of the business affairs and interests of those clients. The Firm is entitled to the benefit of such contacts, relationships and knowledge. The terms of this agreement provide that you may not exploit them for the benefit of any other person or company or for your benefit during and after the employment. You will also be expected to appreciate the skills and knowledge of candidates, whether for on-hire or for specific positions. … In relation to the performance of her duties and obligations of good faith, the Employment Agreement provided (amongst other things) that Ms Callaghan must not:… during or after [her] employment divulge any information about the business affairs or trade secrets of the Firm in circumstances in which it could be expected to harm the interests of the Firm. In relation to confidentiality, the Employment Agreement provided:You will understand the Firm is concerned to protect its sensitive and confidential information, its property and reputation. The Firm also has professional responsibilities and obligations owed to its clients. In order to ensure the Firm correctly protects these, the Firm asks you to sign the attached Confidentiality Undertaking in Annexure A.

Evidence

Evidence Before The Court

It is not in dispute that this review is a hearing de novo. As prospective applicant, AustCorp bears the onus of establishing that an order should be made pursuant to r 7.23.THE EVIDENCE AustCorp relies on two affidavits made by its Managing Director, David Harrison, on 5 December 2022 and on 24 July 2023. AustCorp tendered two bundles of documents (referred to as exhibits in Mr Harrison’s first affidavit) and a copy of a letter dated 24 July 2023 from Mr Harrison’s solicitors to Ms Callaghan’s solicitors inviting agreement to discovery per a proposed amended Originating Application. The prospective defendants rely on two affidavits made by Adrian Byra (who is described as a principal of Lead Group) on 27 April 2023 and 21 August 2023 (16 paragraphs), and one affidavit made by Ms Callaghan on 26 April 2023.BACKGROUND AustCorp is a specialist recruitment business which services its clients by sourcing and providing candidates for recruitment, whether by way of permanent employment or under “labour hire”, in different industry sectors. Its business is divided into specialist recruitment divisions, one of which is Nursing and Aged Care. This division is AustCorp’s largest portfolio based on revenue and profit. AustCorp employs recruitment consultants who act as intermediaries between AustCorp’s clients and the candidates seeking placement with those clients. AustCorp employs (what Mr Harrison called) “360 recruitment consultants”, meaning consultants that have knowledge of the full “briefing lifecyle” with respect to the engagement of appropriate candidates for a particular client. Mr Harrison’s evidence is that recruitment consultants with experience in a particular industry can provide a competitive advantage to their employer where they have client relationships and knowledge of clients’ business requirements. Ms Callaghan commenced employment with AustCorp under an Employment Agreement in the form of a letter dated 2 September 2019. She was employed in the position of Senior Consultant in AustCorp’s Nursing and Aged Care Division. Ms Callaghan had no prior experience working in the Australian aged care sector prior to commencing this employment. The Employment Agreement stated: …In carrying out your duties under this agreement, you are expected to develop good professional relationships with clients, potential clients and candidates. In developing close contacts with clients and potential clients, you will have an intimate knowledge of the business affairs and interests of those clients. The Firm is entitled to the benefit of such contacts, relationships and knowledge. The terms of this agreement provide that you may not exploit them for the benefit of any other person or company or for your benefit during and after the employment. You will also be expected to appreciate the skills and knowledge of candidates, whether for on-hire or for specific positions. … In relation to the performance of her duties and obligations of good faith, the Employment Agreement provided (amongst other things) that Ms Callaghan must not:… during or after [her] employment divulge any information about the business affairs or trade secrets of the Firm in circumstances in which it could be expected to harm the interests of the Firm.

Decision

Reasons for decision

Importantly, however, AustCorp has not limited its claim to possible relief against Lead Manager based on a cause of action in tort. AustCorp also believes that it may have a right to obtain relief against Lead Manager based on a knowing involvement in Ms Callaghan’s possible breach of the duty imposed by s 183 of the Corporations Act and knowing participation in Ms Callaghan’s possible breach of fiduciary duty. I am satisfied that the evidence supports the reasonableness of that belief. The fact that Ms Callaghan was passing on AustCorp documents to Mr Byra leads me to conclude, as I have said, that Ms Callaghan must have had reason to think that Mr Byra had a business interest in seeing these documents. This, in turn, suggests the real possibility that Lead Group may well have had some involvement in obtaining such documents through Ms Callaghan.Conclusion on reasonable belief I am persuaded that AustCorp has satisfied the requirement of r 7.23(1)(a) in respect of the possible right to obtain relief against Ms Callaghan and Lead Manager.Reasonable inquiries: r 7.23(1)(b) The prospective respondents submit that this requirement is not met in two “basic” respects. First, the prospective respondents contend that there is no evidence that AustCorp has consulted its books and records to make its own assessment as to whether, in respect of its four key clients, it has lost work following Ms Callaghan’s employment with Lead Group. Secondly, the prospective respondents contend that there is no evidence that AustCorp made any inquiry of those clients to ascertain the circumstances of their engagement with the prospective respondents. For these reasons, the prospective respondents submit that the Court cannot be satisfied that r 7.23(1)(b) “has been surmounted”. I do not accept that submission. As to the first matter, it is not clear to me—and the prospective respondents do not explain—how, by consulting its own books and records, AustCorp could determine that it has lost business to Lead Manager following Ms Callaghan’s employment with it. As to the second matter, the requirement of r 7.23(1)(b) is conditioned on “reasonable” inquiries. It is not reasonable to expect, as a condition of granting relief under s 7.23, that AustCorp should interrogate its four key clients as to the circumstances of their apparently willing engagements with Lead Manager and Ms Callaghan. I can well understand any reluctance on the part of AustCorp to initiate communications with its clients—particularly its key clients in a particular sector—which might appear to those clients to be in any way threatening or which might be understood by them as questioning the propriety of their business decisions to engage with Lead Manager and Ms Callaghan. I accept AustCorp’s submission that the notion of reasonable inquiries does not mean exhaustive inquiries. Further, the fact that AustCorp could have made further inquiries does not mean that it has not already made reasonable inquiries.

Ratio Decidendi

Legal Principle Established

Mr Harrison believes that AustCorp may have a right to obtain pecuniary relief against Ms Callaghan by way of damages, an account of profits, equitable compensation, or statutory compensation based on causes of action for: (a)breach of contract, specifically the restraint to which I have referred; (b)breach of fiduciary duty, specifically on the basis that Ms Callaghan may have used information she obtained while preparing tenders on behalf of AustCorp for its clients, or used other confidential information to advance her own interests as a prospective employee of Lead Group; (c)breach of the duty imposed by s 183 of the Corporations Act 2001 (Cth) (the Corporations Act) by using AustCorp’s information to gain an advantage for herself or Lead Group or to cause detriment to AustCorp. Mr Harrison believes that Lead Group may have used confidential information provided to it by Ms Callaghan to obtain clients from AustCorp. He believes that he may have a right to obtain pecuniary relief against Lead Group by way of damages, an account of profits, equitable compensation, or statutory compensation based on causes of action for: (a)tortious inducement of breach of contract by Ms Callaghan, in particular in relation to her post-employment restraint obligations; (b)knowing participation in Ms Callaghan’s breaches of fiduciary duty; and (c)involvement in Ms Callaghan’s breach of the duty imposed by s 183 of the Corporations Act. Mr Harrison’s evidence is that he has made inquiries in relation to whether AustCorp does have these causes of action. In this regard he refers, in particular, to the course of correspondence passing between his solicitors and Ms Callaghan’s solicitors in the period 3 December 2021 and 7 August 2022 and to the review that has been undertaken concerning Ms Callaghan’s IT activity during her employment with AustCorp. He says, however, that despite these inquiries he does not have sufficient information in order to decide whether or not to commence proceedings against Ms Callaghan and Lead Group. In particular, he says that he does not know: (a)the extent to which Ms Callaghan has retained, disclosed and used information that she obtained during her employment with AustCorp from the time she has been employed by Lead Group; (b)whether, and the extent to which, Ms Callaghan may have used and disclosed AustCorp’s confidential information to Lead Group as a means of enticing Lead Group to offer her employment; (c)the extent to which Ms Callaghan has solicited business from AustCorp clients with whom she had dealings during the last two years of her employment with AustCorp;(d)the extent to which Lead Group has been knowingly involved in Ms Callaghan’s conduct since she commenced employment with Lead Group; (e)whether Lead Group induced Ms Callaghan to engage in the conduct in breach of her obligations to AustCorp; and (f)the potential loss of revenue to AustCorp as a consequence of Ms Callaghan’s conduct, and the potential profit that has been derived by Lead Group from her conduct.