Barnes v Hance
[2001] VSC 238
•20 July 2001
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION No. 2028 of 2000
COMMERCIAL LIST F.5142
| KEITH ROBERT BARNES | Plaintiff |
| v | |
| ROBERT JAMES HANCE and DAVID WILLIAM MUIR | Defendants |
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JUDGE: | Mandie J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 21-22 February 2001, 30 May 2001 | |
DATE OF JUDGMENT: | 20 July 2001 | |
CASE MAY BE CITED AS: | Barnes v Hance | |
MEDIUM NEUTRAL CITATION: | [2001] VSC 238 | |
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CONTRACT - enforcement of option agreements by plaintiff - whether alleged act of default entitled defendants to terminate option agreements - act of default constituted by breach of provision in associated agreements between plaintiff and former employer - whether provision in associated agreements was an unreasonable restraint of trade - severance - estoppel
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D Denton | Clayton Utz |
| For the Defendants | Mr M Sifris | Deacons |
HIS HONOUR:
The plaintiff ("Barnes") claims specific performance of two share call option agreements ("the option agreements"), dated 31 October 1997, which he entered into, one with each of the defendants, Hance and Muir. Each of the option agreements granted to Barnes an option to purchase up to 30,000 ordinary shares of two cents in Timbercorp Eucalypts Ltd, now called Timbercorp Ltd ("Timbercorp"), at an exercise price of 75 cents per share. During the "Exercise Period" (31 October 1999 to 7 November 1999), Barnes exercised the options and claims to be entitled to a transfer of a total of 600,000 shares in Timbercorp for a total price of $45,000 - 300,000 shares from each of the defendants. The reason for the increase in the number of shares is that there was a ten for one share split in August 1999. The defendants say that Barnes was not entitled to enforce the option agreements or to exercise the options because they have terminated the option agreements due to an "act of default" by Barnes as defined by cl.6.1 (c) of the option agreements, which provided that it was an act of default by Barnes if he "has at any times been in breach of his obligations" under a Deed of Mutual Release between Barnes, Timbercorp and Timbercorp (W.A) Pty Ltd dated 31 October 1997 ("the DMR"). The issues between the parties raise questions of restraint of trade and related matters but before defining the issues it is necessary to outline the facts.
Facts
Barnes, a resident of Perth, Western Australia, is a qualified Chartered Accountant, Certified Practising Accountant, a Fellow of the Australian Institute of Company Directors and an Associate of the Australian Institute of Management. He was employed with Arthur Andersen as a Chartered Accountant from 1973 to 1980. From 1980 to 1988 he was employed by a large diversified industrial holding company, Winterbottom Holdings Limited, first as Finance Controller and later in a senior role as Finance Director. After two short-term jobs in 1988-9, he was employed from 1990-1 as Chief Financial Officer of the Bunnings Ltd group, one of Western Australia's larger public companies. He met the defendants, who were directors of Timbercorp, in this period. In 1992 he was involved in a project in Melbourne and then returned to Perth.
In about April 1993 Barnes was engaged by the defendants on behalf of Timbercorp on a commission only basis and appointed, in addition, as a Director at a fee of $5,000 per annum. His primary role at that stage was agreed to be the marketing of investment units in Timbercorp's managed plantations to financial intermediaries in Western Australia and to the general investing public by whatever reasonable means he thought appropriate. In the financial years from 1993-4 to 1996-7, Barnes continued in this role and achieved substantial and increasing sales in Western Australia of Timbercorp's "woodlot units". In 1993-4 Timbercorp sold 251 units in Western Australia with a value of $828,300. In 1996-7 sales of units in Western Australia reached 1,578 with a value of $5,680,800.
In or about November 1995 Hance informed Barnes that it was proposed to list Timbercorp on the Australian Stock Exchange.
In February 1996 Barnes drafted a letter on behalf of Timbercorp to be sent to the Australian Securities Commission dealing with certain complaints to the ASC about alleged contraventions of the Corporations Law. The draft letter contained the following statements which Barnes testified represented "his view at that time":
"We are well aware that we operate in investment area of the marketplace, that is the so-called "tax effective projects", and that it has seen more than its share of failed schemes or projects as well as a fair crop of dubious and/or incompetent promoters. As indicated above, we operate primarily in the commercial afforestation and viticultural sectors, with the intent of becoming major suppliers, on behalf of our investors for the most part, of timber and wine grapes. Providing certain fundamental financial criteria are strictly adhered to we see sound medium-term returns arising for investor and manager alike, and in an area of business that is strongly in line with the national economic interests.
We find the continual proliferation of many other "schemes" in the tax effective area, such as tea trees, macadamias, cotton farms, fruit trees, cattle breeding, paulownias etc a real nuisance but they have every right to be there as we do. Typically all these schemes are highly leveraged using non-recourse finance supplied by related party, and their cost structures are at best grossly excessive when compared to the real underlying cost of doing the work or providing the service. We expect, as has been the case in the past, that the greater proportion of these projects will ultimately fail and cost their investors."
On 6 March 1996 Barnes entered into an Executive Service Agreement ("the ESA") with Timbercorp. The ESA contained the following relevant provisions:
" Recitals
(a) The company is a timber resource management company that specialises in the promotion and management of hardwood plantation projects in Western Australia
…
1.1 Definitions
…
"Business" means the business of the Company and includes provision of timber resources and the promotion and management of hardwood plantation projects in Australia;
"Commencement Date" means the date on which the ordinary shares in the Company are listed for quotation by the Australian Stock Exchange Limited;
"Customer List" means the details of persons and organisations which have participated in hardwood plantation projects promoted or managed by the Company or who have borrowed any moneys from the Company or a related Body corporate;
"Employment Period" means the period commencing on the Commencement Date and continuing:
(a)for five years thereafter …;
"Restraint Period" means the aggregate of the Employment Period and the period of restraint determined in accordance [with] paragraph 11.2 (b);
2 Engagement of Executive
The Company will employ the Executive for the Employment period…
[The ESA specified his normal place of work as Timbercorp's Perth office and his annual base remuneration package as $90,000]
[cl. 9.1 provided for immediate termination on specified grounds].
9.4 Termination at discretion of Company
The Company may at its sole discretion terminate this agreement for any reason…but shall give not less than six months written notice and pay an amount for compensation … [a formula was then set out]
Restraint
11.1 Non Solicitation
The Executive covenants that the Executive will not during the Restraint Period either on the Executive's own account or for any person, solicit or entice or endeavour to solicit or entice from the Company or its related Bodies Corporate:
…
(b) the custom of any person who is or has been a customer or client of the Company or its related Bodies Corporate during the Restraint Period.
11.2 Restraint
The Executive will not, without the prior written consent of the Company, from the date of the expiration of the Employment Period, be as principal interested or engaged or act as an adviser or consultant in, or be an employee, agent or officer of, or an adviser or consultant to:
(a) (i) any corporation, partnership, joint venture, undertaking, trust or enterprise business ("Entities") which carries on a business which compete with the Business …
(b)for a period of
(i)3 months;
(ii)6 months;
(iii)12 months; and
(iv)24 months;
(c)in:
(i)Victoria; and
(ii)Western Australia; and
(iii)New South Wales; and
(iv)Queensland; and
(v)South Australia; and
(vi)Tasmania; and
(vii)Northern Territory; and
(viii)Australian Capital Territory; and
(ix)Victoria and Western Australia; and
(x)Australia.
11.3 Interpretation of Clause 11.2
(a)Each of the covenants contained in clause 11.2 is to be construed as a separate independent covenant severable from all other covenants contained in clause 11.2. If any of the separate covenants is found to be void, invalid or otherwise unenforceable such unenforceability does not affect the validity or enforceability of any of the other separate covenants.
(b)It is intended by the parties that the restraints contained in this clause operate to the maximum extent.
(c)The Executive acknowledges that the duration, extent and application of the respective restrictions contained in this clause are not greater than is reasonably necessary for the protection of the interests of the Company but that, if such restriction is adduced (sic) by any court of competent jurisdiction to be void or unenforceable but would be valid if part of the wording of this clause were deleted and/or the period was reduced, those restrictions apply with such modifications as may be necessary to make this clause valid and effective.
…
14.15 Entire Understanding
(a)This document embodies the entire understanding and agreement between the parties as to the subject matter of this document.
(b)All previous negotiations, understandings, representations, warranties, memoranda or commitments in relation to, or in any way affecting, the subject matter of this document are merged in and superseded by this document and will be of no force or effect whatever and no party will be liable to any other party in respect of those matters.
(c)No oral explanation or information provided by any party to another:
(i)affects the meaning or interpretation of this document, or
(ii)constitutes any collateral agreement, warranty or understanding between any of the parties…."
Timbercorp was at the relevant times an "agribusiness investment management company" which specialised in the promotion and management of hardwood plantation projects (in Western Australia until 30 June 1997 and after that date also in the south-east of South Australia and in south-west Victoria). More recently, it has diversified its activities into the promotion and management of large-scale olive and almond projects.
The defendant Hance testified and I accept that Barnes' primary function was to encourage persons in Western Australia to invest in Timbercorp's annual prospectus projects and that Timbercorp's main source of income was management fees which it derived from subscriptions to those projects. Subscribers to the prospectus were offered the prospect of substantial future income from their investment together with a tax deduction for all funds subscribed. Individuals on high marginal tax rates were most attracted to invest in such projects. Timbercorp marketed its investment products through a network of financial intermediaries ie accountants, financial planners and advisers, that it had built up over many years, and to a lesser extent through advertising directly to the public in newspapers and magazines.
Hance deposed that the accountants and advisers comprising Timbercorp's distribution network had been instructed on the commercial, environmental and taxation aspects of Timbercorp's projects and the network consisted of those intermediaries who were prepared to recommend a Timbercorp investment to those of their clients whom they considered would benefit from such an investment. An advisor or accountant might receive a commission from Timbercorp based on the level of the clients' investment or might elect to "rebate" such commission to the client and invoice the client on a fee for service basis.
Hance said and I accept that key aspects of Barnes' role at Timbercorp were marketing the annual prospectus, maintaining support from existing advisors and actively expanding the network by attending and participating in seminars, presentations, tours and the like. Barnes also participated in the preparation of at least one prospectus for Timbercorp, the 1997 prospectus.
Mr S Rabinowicz, a director of Timbercorp, testified that, at the relevant times, Timbercorp was principally in the business of promoting and managing tax-effective plantation projects and providing finance to investors in its projects. Money was raised (in the main) from persons seeking to invest in an agricultural-based investment that offered taxation benefits in the form of taxation deductions for expenditure incurred. Mr Rabinowicz deposed that plantation projects competed for funds with other types of investment but particularly competed for funds with other agricultural–based tax-effective projects. Interests were generally marketed through financial intermediaries, such as accountants or financial advisors, who received commissions or referral fees. The market for agricultural-based tax-effective projects was highly competitive and Timbercorp had spent considerable time and resources building business relationships with financial intermediaries around Australia. Timbercorp had offices around Australia and employed about 90 full time staff and a substantial number of part time and casual staff (or contractors) on a seasonal basis. I accept that evidence of Rabinowicz which, in large part, was confirmed by Barnes.
On 27 August 1997 Timbercorp terminated Barnes' employment in its discretion under cl.9.4 of the ESA. Barnes resigned as a Director. Negotiations followed between Barnes and Timbercorp concerning a "termination package". By letter dated 31 August 1997 from Barnes to Muir (who was also the Executive Chairman of Timbercorp), Barnes responded in detail to a letter of offer from Timbercorp. Among the many matters mentioned, Barnes said in relation to cl.11 of the ESA that he would not contact any existing clients, sales agents, contractors and suppliers of Timbercorp as at the date of termination for any purpose competitive with the business of Timbercorp and that "[w]ith respect to business competitive with Timbercorp, this was to apply to any business promoting and managing hardwood or softwood plantation projects in Australia". Barnes proposed that the restraint should be effective in Western Australia for a period of 12 months, "so as to maintain a fair balance between protecting the interests of [Timbercorp] and allowing me to get on with my career".
Discussion and correspondence concerning a proposed settlement continued. Hance handled the negotiations with Barnes on behalf of Timbercorp and on behalf of Muir and himself. An offer of two option agreements from the defendants (each in relation to 50,000 shares) was made to Barnes, subject to various conditions including adherence to the ESA and to certain defined restraints. On 10 October 1997, Hance faxed to Barnes a letter, together with a draft DMR which, inter alia, dealt with the ESA and provided for a defined restraint by replacing cl.11.2 of the ESA (in words identical to those ultimately provided for by the DMR in its executed form).
By fax dated 20 October 1997 from Barnes to the defendants and Timbercorp, Barnes dealt with the draft DMR and of cl.11.2 said:
"I am advised that this clause is drawn so wide as to be essentially unworkable. I think this wording needs to be reconsidered more in line with what [Timbercorp's] business actually is and is projected to be in the near term."
Having received legal advice by this stage, Hance was of the view that the new version of cl.11.2 was enforceable. By fax dated 23 October 1997, the defendants responded to Barnes' fax of 20 October, stating in relation to cl.11.2:
"There has never been any doubt as to the type of business we are in. We sell a financial or investment product that includes as one of its features the availability of a tax deduction. …clause 11.2 as amended provides that you will not in competition with the Company business be involved in such business. This is not your principal occupation and given the proposed settlement, a two year restriction is reasonable, workable and according to our lawyer enforceable.
Your comments relating to other competing projects once again re-enforces your fundamental misunderstanding of our approach. We prefer to co-exist with other competing projects by spending all our time and resources on promoting the Timbercorp project and its features rather than fighting with competitors…We do not want an ex director and ex senior employee who is intimately acquainted with our product, processes and clients to be promoting a competing project in competition with the company for a two year period. This point is fundamental to any settlement (and indeed your entitlement to exercise any of the options)."
(Emphases added)
There was evidence of a conversation or conversations between Barnes and the defendants prior to the above fax of 23 October 1997 in which the defendants said words to the effect of the last sentence of the fax quoted above but I do not think that this evidence added to the effect in law (if any) of what was said in the fax.
Barnes next said in a fax of 24 October 1997 that he was concerned at the tenor of the 23 October fax and suggested keeping away from language that was "overly legalistic". On 27 October 1997, by fax, Hance invited Barnes to respond to their 23 October fax "advising us of those clauses of the Deed…which are acceptable to you…[t]his done, we can isolate those clauses which are causing concern and see whether we can resolve them".
Barnes then wrote his responses directly upon the 23 October 1997 fax and faxed it back to Timbercorp on 28 October 1997. His written comments in relation to cl.11.2 were:
"I find your comments here very offensive and grossly incorrect. I have not worked as an "accountant" per se since well before [year obscured]. Aside from [that comment] – I would like to discuss with you the simple concept of accepting this wording in clause 11* – providing you can meet me on moving "option consideration" "97 bonus" and then pay up… ." (*emphasis added)
Hance testified, and I accept, that at this stage he came to believe that Barnes was prepared to accept the wording and the enforceability of the new cl.11.2 (if the other matters could be resolved).
On 29 October 1997 Barnes sent another fax to Timbercorp, stating inter alia:
"…apart from [identified matters], there are no substantive matters that will prevent us from bringing this matter to a conclusion. My solicitor is departing overseas tonight for two weeks – I need for him to be satisfied on any material issues but the rest I can handle myself."
Subsequent correspondence shows that Barnes agreed to cl.11.2 "in its current form" (viz the new version). There were also some further oral negotiations as a result of which the number of shares the subject of each option agreement was reduced from 50,000 shares to 30,000 shares. The DMR was executed by Barnes, Timbercorp and a related company on or about 31 October 1997 and it contained:
·provision for a net settlement sum of $110,264 payable to Barnes (after deduction of about $256,000 for group tax plus certain monies owed by him to Timbercorp);
· mutual releases;
·various other provisions including those dealing with Directors' liability insurance and amendments to the employee and directors option plan;
· the following clauses:
"11. NON COMPETITION
The employee acknowledges as fair and reasonable and will continue to comply with clauses 10, 11 and 12 of his Executive Service Agreement dated 6 March 1996.
Clause 11.2 shall be read as having been deleted and replaced with the following:
"The Executive shall not, for the periods set out in clause 11.2(c) and in the regions set out in clause 11.2(d) in competition with the Company Business, without first obtaining the consent of the company in writing:
(a)be interested or engaged or act as an adviser or consultant in, or be an employee, agent or officer of, or an adviser or consultant to any corporation, partnership, joint venture, undertaking, trust, enterprise or business which carries on a business which competes with the Company Business which intends upon the involvement of the Executive to so compete; or
(b)solicit or compete for the custom of or exploit or engage in business with any person, firm, business or corporation who or which at any time during the 12 months preceding the termination of the employment of the Employee was a customer or client of the Company;
(c)for a period of
(i)3 months;
(ii)6 months;
(iii)12 months; and
(iv)24 months;
(d)in :
(i)Victoria and
(ii)Western Australia; and
(iii)New South Wales; and
(iv)Queensland; and
(v)South Australia; and
(vi)Tasmania; and
(vii)Northern Territory; and
(viii)Australian Capital Territory; and
(ix)Victoria and Western Australia; and
(x)Australia.
(e)For the purposes of paragraph (a) the expression "a business which competes with the Company Business" includes but is not limited to a business that develops, creates, promotes, deals in, offers or issues, whether directly or indirectly, any form of financial or investment product or structure which includes as one of its features the availability of taxation benefits or deductions.
17. SEVERABILITY
If any provision of this Deed is held to be invalid or unenforceable for any reason, it will be severable, and will not affect the remaining provisions of this Deed.
18. ENTIRE DEED
This Deed constitutes the entire agreement of the parties relating to this Deed of Mutual Release. It supersedes all prior understandings, negotiations, agreements, written or oral, express or implied in relation thereto."
At the same time, the two option agreements were executed between Barnes and the defendants. Clause 6.1(c) of each option agreement provided that it was an act of default if Barnes "has at any time been in breach of any of his obligations under the [DMR]." Clause 8 entitled the innocent party to terminate the option agreement upon the occurrence of an act of default.
On 4 June 1998 Brookhampton Vineyard Management Ltd (a vineyard manager and securities dealer) had issued a prescribed interest prospectus offering vineyard investment interests for sale to the public. On 1 July 1998, Barnes formally accepted employment with Brookhampton Estate Pty Ltd, an associated company which owned vineyards. Barnes' duties involved organising and supervising contractors to prepare land to be planted, organising the materials and services required for planting, irrigation and the like, and assistance with administration. However Barnes was involved with others in planning the "Brookhampton Estate" project from some time in November 1997. In December 1997, Barnes was involved in the selection of land to be purchased for a "WA grape venture" and the author of, or involved in the preparation of, a draft information memorandum for investors dealing with a proposal for the setting up of a "business of large-scale wine grape growing through the establishment of an investment management company, purchase of freehold and the sale of investment units via a registered prospectus". Barnes later assisted in the preparation of the Brookhampton Estate prospectus.
In opening, Mr Denton of Counsel for Barnes expressly admitted that Barnes was "interested in promoting the [Brookhampton Estate] venture from about December 1997 onwards". Mr Denton conceded that Barnes had acted in breach of cl.11.2 (a) of the ESA in its amended form and thus in breach of cl.11 of the DMR, if those provisions were valid. The breach was, in essence, that Barnes had within 6 months of termination of his employment with Timbercorp been interested or engaged or acted as an adviser or consultant to a business or undertaking which competed or intended to compete with Timbercorp's business, that is, a business that promoted a form of financial or investment product including as one of its features the availability of taxation benefits or deductions. However, Barnes raised, as an answer to this alleged act of default, issues of unreasonable restraint of trade, to which issues it will be necessary to return.
The issues raised by the pleadings.
In answer to Barnes' claim for specific performance of the option agreements, the defendants' defence alleged that Barnes had during the Restraint Period acted in breach of cll.11.1 and 11.2(a) of the ESA. This was in turn a breach of cl.11 of the DMR and therefore an "act of default" under the option agreements on the basis of which the defendants had terminated the option agreements.
The alleged breach of cl.11.1 of the ESA (to be precise, cl.11.1 (b)) was that Barnes had endeavoured to solicit or entice from Timbercorp the custom of persons who were or had been clients of Timbercorp. The particulars given of this allegation were:
"The Plaintiff sought to solicit the custom of clients of the Company by causing a Victoria wide mail out to all accountants, which included accountants who were clients of the Company, of a brochure promoting the Brookhampton Vineyard Project, being a tax scheme which competed with tax schemes promoted by the Company, to its clients."
The alleged breach of cl.11.2 (a) of the ESA was that Barnes was engaged by or acted as a consultant or adviser to Brookhampton Vineyard Management Services Ltd which was a company which carried on a business which competed with Timbercorp's business. The particulars given of this allegation were:
"Brookhampton Vineyard Management Services is, and at all material times was, engaged in promoting competitive tax schemes in competition with that of [Timbercorp]."
The defendants provided further particulars in relation to the alleged breaches of the ESA as follows:
"In or about January 1999 the Plaintiff had acquired land in Donnybrook for a tax effective vineyard project.
In or about February 1999 the Plaintiff was involved in the promotion and management of a tax effective Vineyard project called the Brookhampton Estate vineyard project.
In or about March 1999, the Plaintiff promoted interests in the Brookhampton Estate project to Bryan James by way of a meeting, telephone discussions and forwarding correspondence to him.
In or about June 1999 the Plaintiff forwarded a letter to at least one Chartered Accountancy firm, Lidell White & Co., promoting interests in the Brookhampton Estate project.
In the financial years ended June 1998 and June 1999, Timbercorp was in the business of promoting and managing tax effective plantation projects.
Plantation projects raise moneys from persons seeking to invest in agricultural based investment that offers taxation benefits in the form of taxation deductions for expenditure incurred.
Plantation projects compete for funds with other types of investment but most particularly with other agricultural based tax effective projects. A general feature of such projects is that tax benefits are generally confirmed by a product ruling issued by the Australian Taxation Office. Further, financial intermediaries such as accountants or financial advisers generally distribute such projects.
The Brookhampton Estate project was an agricultural based tax effective investment project.
A person seeking to invest in an agricultural based tax effect (sic) investment project would face a choice between a number of such projects, including, the Timbercorp Eucalypts Project or the Brookhampton Estate Project.
By promoting the Brookhampton project to accountants, the Plaintiff was involved in a business that completed with Timbercorp's business."
By an amended reply dated 8 February 2001, Barnes pleaded that various clauses [1] of the ESA were restraints of trade and void, and "if a term of the option agreements" they should be severed. Barnes referred to the severance provisions in cll.11.3 and 14.9 of the ESA and cl.17 of the DMR.
[1]Clauses 11.1(b), 11.2(a), 11.2(c)(ii), (iii), (iv), 11.2(d)(i), (iii) to (x) and 11.2(e).
By an amended rejoinder dated 2 April 2001, the defendants pleaded that if cl.11 of the ESA was a restraint of trade and void, then the option agreements were unenforceable because, if the "promise" by Barnes was in restraint of trade, it constituted the "sole or main consideration for the promise" made by each of the defendants and there was therefore no consideration for the defendants' obligations under the option agreements. The defendants further pleaded that the respective obligations of Barnes and the defendants were mutual and interdependent and that if Barnes' obligations were unenforceable then the defendants' obligations were also unenforceable. The defendants further pleaded that it would be unjust to enforce the defendants' obligations because the enforcement only of their obligations would change the character of the option agreements to such an extent that they could not be considered as the agreements which the parties intended to enter into.
The amended rejoinder also contains an estoppel plea by the defendants based upon the alleged assumption, said to have been induced by Barnes, that he would comply with the restraints of trade to the fullest extent and that the restraints were fair and reasonable and fundamental to the settlement and to his entitlement to exercise the options. The defendants alleged that Barnes was departing from this assumption by contending that the restraints of trade were unenforceable and severable from the DMR and that he should be estopped from relying upon those contentions.
Finally, by their amended rejoinder, the defendants alleged that the restraints of trade were reasonable and necessary to protect the legitimate interests of Timbercorp and the defendants and they provided the following particulars:
"(a) As an employee of Timbercorp during the period April 1993 -- August 1997, the Plaintiff had access to information including confidential information of Timbercorp including advertising and marketing strategies, and technical information relating to the structuring of tax effective projects. Such knowledge was acquired during the duration of the Plaintiff's employment with Timbercorp. During the period of his employment, the Plaintiff received remuneration by way of salary and bonuses.
(b) as an employee of Timbercorp, the Plaintiff was specifically involved on a day-to-day basis in promoting and managing tax effective plantation projects, and providing finance to investors in the projects.
(c) during the course of his employment in what is a highly competitive industry, the Plaintiff has had access to Timbercorp's network of financial intermediaries such as accountants and advisers. These financial intermediaries are fundamental to the success of Timbercorp. Since 1992, Timbercorp has spent substantial time and resources building business relationships with these financial intermediaries from around Australia, in order to increase the possible market for its projects.
(d) through successful promotion, Timbercorp is one of the largest companies involved in tax effective plantation projects in Australia."
The pleadings closed with a surrejoinder dated 11 April 2001 in which, inter alia, Barnes denied the facts said to give rise to an estoppel and pleaded further that there could be no estoppel preventing him from contending that there were restraints of trade which were void and severable from the various agreements.
Construction of the option agreements.
The Recital and cl.3.1 of the option agreements show that the consideration for the grant of the options contained in the option agreements was Barnes' entry into the DMR. It follows that, if the DMR were wholly unenforceable, the option agreements would be unenforceable for lack of consideration. On the other hand, if parts of the DMR are unenforceable and the parties to the DMR intended that unenforceable parts of the DMR should be severable, the existence of a partly enforceable DMR would not in my view render the option agreements unenforceable for lack of consideration. Consideration for the options to purchase would remain, constituted by the fact of entry into the DMR. The defendants pointed to cl.2 (e) of the option agreements which provided that the "agreement is construed and interpreted as a conditional contract". I do not think that this should be read as an express stipulation that the enforceability of the options was conditional upon the whole of the DMR being enforceable. The defendants knew or must be taken to have known that the DMR contained a severance clause. It cannot in my view be inferred from the option agreements or cl.2 (e) thereof that the defendants intended the grant of the options to be conditional upon the whole of the DMR being enforceable. In my opinion, cl.2 (e) is probably intended to emphasise that the option agreements were conditional upon Barnes entering into the DMR. I note that if cl.2(e) was intended merely as a reference to cl.6.1(c), it would be superfluous.
The central question which arises under the option agreements is whether Barnes committed an act of default by breaking his obligations under the DMR. To determine that question, it is necessary to turn to the provisions of the DMR itself.
Construction of the DMR.
The DMR is between Timbercorp as employer (and an associated company) and Barnes as employee. Clause 17 expressly provides that if any provision of the DMR is held to be invalid or unenforceable for any reason, it will be severable, and will not affect the remaining provisions.
Clause 11 of the DMR contains Barnes' covenant to "continue to comply with clauses 10, 11 and 12" of the ESA and goes on to substitute a new cl.11.2 in the ESA. If any or all of cll.10, 11 or 12 of the ESA, or any parts thereof, were unenforceable as unreasonable restraints of trade, prima facie those clauses or the relevant parts thereof would be severable by virtue of cl.17 and the rest of the DMR would be enforceable, containing, as it does, important and independent provisions (see cll.1 to 6 and 8 to 10).
Breaches of the DMR.
Barnes conceded that he had committed a breach of the substituted cl.11.2 (a) of the ESA and therefore a breach of his obligations under cl.11 of the DMR. It is therefore necessary to determine whether cl.11.2 (a) of the ESA, and cl.11 of the DMR (to that extent), is an unreasonable restraint of trade. The defendants also alleged that Barnes had committed a breach of cl.11.1 (b) of the ESA and thus a further breach of his obligations under clause 11 of the DMR. That breach was denied and that issue should be determined before turning to questions of unreasonable restraint of trade.
Alleged breach by Barnes of clause 11.1 (b) of the ESA.
The defendants did not prove that Barnes had sought to solicit the custom of clients of Timbercorp by causing a Victoria-wide mail-out to all accountants, including accountants who were clients of Timbercorp, of a brochure promoting the Brookhampton Estate project.[2]
[2]See the particulars quoted in para [26] above.
The defendants' sole submission in relation to cl.11.1 (b) was that the evidence of an accountant, one James, showed that Barnes during the Restraint Period had sought to entice or solicit the custom of a person (James) who was or had been a customer or client of Timbercorp.
The evidence on this issue was as follows.
In February 1999, Bryan Charles James, a chartered accountant practising in Victoria, was asked by Timbercorp, through an intermediary, to seek to confirm Barnes' association with Brookhampton Estate. James telephoned Barnes and asked him about tax minimisation products. By letter to James dated 4 March 1999 from Brookhampton Vineyard Management Ltd, signed by Barnes as Project Manager, information concerning the vineyard project, and the financial advantages of investment in it, was conveyed to James. James, who was going to Perth on other business, met Barnes there later in March 1999. At that meeting Barnes recommended investment in the Brookhampton project over the Timbercorp project. He told James that he was formerly involved with Timbercorp and was now involved with the Brookhampton project. James testified that Barnes did not say that this project would provide a greater benefit than the Timbercorp project but rather that he was now promoting and selling a particular product, namely the Brookhampton vineyard.
Barnes did not know at any relevant time that James had any prior relationship with Timbercorp. James testified that he had "been an investor with Timbercorp in their products, and through our accounting and financial planning firm we have also been -- we've provided advice to our clients about Timbercorp products" and that his "relationship" with Timbercorp commenced "around April 1997".
I do not accept the defendants' submission on this issue in the light of the foregoing evidence and the language of cl.11.1 (b). The evidence does not establish that Barnes endeavoured to solicit or entice from Timbercorp the custom of a customer or client of Timbercorp. In my opinion, cl.11.1 (b) is aimed at intentional conduct. In fact what happened was that James approached Barnes. There was in those circumstances no solicitation or enticement by Barnes of James. Further, the evidence does not in my view satisfactorily establish that James was an existing or past "customer or client" of Timbercorp. To be a "customer" or "client" of Timbercorp is, in my opinion, in the context of Timbercorp's business, to be an investor in a Timbercorp project or to be a borrower from Timbercorp or to have some other relevant business relationship but not simply to be a person who may "advise his clients about Timbercorp products". The evidence does not show when James himself first became an investor with Timbercorp. Alternatively, I do not think that the evidence shows that Barnes sought to solicit or entice custom "from" Timbercorp but, rather, simply to gain custom for the Brookhampton project.
Having regard to those conclusions, it is unnecessary to consider the submissions made on behalf of Barnes that cl.11.1 (b) was an unreasonable restraint of trade, either totally, or as applied to a period of 24 months after termination of Barnes' employment.
Is cl.11.2 (a) of the ESA, or cl.11 of the DMR (to that extent), an unreasonable restraint of trade?
It was common ground that cl.11.2 (a) of the ESA was prime facie an unreasonable restraint of trade and void or unenforceable and that the onus lay upon the covenantee, or those seeking to rely upon the provision, to establish that it was reasonable in the interests of the parties. Clause 11.2 (a) prevented Barnes, a former employee, from competing with his former employer and it was accepted that the defendants had to show that cl.11.2 (a) did no more than protect some legitimate interest of Timbercorp. The interests of the defendants as directors and shareholders of Timbercorp (if relevant) were no different. The time for judging such matters is the time when the relevant agreement is entered into but taking into account future foreseeable possibilities. There was no debate as to whether the relevant time for this purpose was the original date of the ESA or the date of the DMR, when the ESA was amended. I would have thought the latter, but it was not contended that it made any difference.
In my opinion, the defendants have failed to establish the matters which they had particularised as showing that cl.11.2 (a) was reasonable and necessary to protect the the legitimate interests of Timbercorp.[3] I am not satisfied that there was any "confidential information of Timbercorp including advertising and marketing strategies, and technical information relating to the structuring of tax effective projects" to which Barnes (or anyone else) had access. Even if there was, cl.11.2 (a) was framed too widely to protect such an interest.
[3]See para [32] above.
The evidence did establish, but only in a very broad and generalised fashion, that Barnes had access to a "network of financial intermediaries such as accountants and advisers" and played an important part in building "business relationship with these financial intermediaries" but, again, cl.11.2 (a) was framed too widely simply to protect these business relationships (assuming, but not deciding, that there was a legitimate interest to protect in that area). Counsel for the defendants could not suggest how the provision might be read down, or blue-pencilled, so as to reasonably protect that interest alone.
In my opinion, the version of cl.11.2 (a) of the ESA introduced by the DMR is a very broad restraint upon Barnes' competing in any way with Timbercorp and is an unreasonable restraint of trade.[4] Therefore cl.11 of the DMR is, to that extent, an unreasonable restraint of trade and void and unenforceable.
[4]Cf. Drake Personnel Ltd v Beddison [1979] VR 13, 19, 23-4, per Anderson J.
Severance and its effect.
In my view, that part of cl.11 of the DMR which purports to insert cl.11.2 (a) in the ESA is severable by virtue of cl.17 of the DMR and the remaining provisions of the DMR, including the balance of cl.11 thereof, remain unaffected and valid. Apart from cl.11.1 (b), the defendants did not seek to rely upon a breach of any other part of the DMR, or any other part of the ESA in its original or amended form.
As a result of such severance, the defendants cannot establish an "act of default" based upon Barnes' breach of cl.11 of the DMR and cl.11.2 (a) of the ESA. Nor can the defendants contend, for the reasons already stated,[5] that the option agreements fail for lack of consideration, or are void as a result of the unenforceability of inseverable parts of the DMR or of the option agreements themselves.[6]
[5]See paras [34] to [37] above.
[6]See McFarlane v Daniell (1938) WN (NSW) 132; Howard F. Hudson Pty Ltd v Ronayne (1972) 126 CLR 449, 463-4 per Walsh J.
A number of cases involving questions of the interdependence of provisions versus their severability were cited but in none of these cases was there an express severance clause.
I should add that, apart from the estoppel defence, which I will deal with next, no principle was suggested or argument raised whereby it could be concluded that cl.11 of the DMR was void to the extent mentioned vis-a-vis Timbercorp but remained an enforceable obligation for the purpose of the definition of "act of default" under the option agreements. It must be emphasised that cl.6.1 (c) of the option agreements defined an "act of default" by Barnes as any breach of his obligations under the DMR. It follows that, to the extent that cl.11 of the DMR is unenforceable by Timbercorp against Barnes, there can be no breach by Barnes of his obligations under the DMR and hence no act of default by Barnes under the option agreements.
Estoppel.
The defendants submitted that they had entered the option agreements upon the assumption that the relevant restraints (for present purposes, cl.11.2 (a) of the ESA as provided by cl.11 of the DMR) were legally enforceable and that this assumption was created by Barnes and it would be unconscionable for him to resile from it. I accept that Hance believed that cl.11.2 was legally enforceable but I do not accept that his belief was created or encouraged by Barnes. Hance held this belief by 23 October 1997, if not earlier. Subsequently Barnes indicated that he might accept the "wording" proposed by the defendants and ultimately he did, but I do not consider that this fortified Hance's belief that it was enforceable, or, even if it did, that he was reasonably entitled to take that view as a result of Barnes' conduct. The defendants clearly conveyed to Barnes that the restraints were fundamental to the settlement from their point of view but he did nothing to encourage any belief that he was accepting any conditions, other than those appearing in the written documents, or accepting any interpretation other than that which arose from the written documents. Both sides were receiving legal advice during the negotiations.
Alternatively, if Barnes would otherwise have been estopped from contending that the relevant restraint was unenforceable, such an estoppel is not available in the case of an unreasonable restraint of trade, which is void and unenforceable because it is contrary to public policy.[7]
[7]See Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432, at 444 per Taylor J, at 482 per Windeyer J.
Conclusion.
For the foregoing reasons, the plaintiff is entitled to specific performance as claimed. I will hear submissions on the form of the orders and on the questions of damages and costs at an appropriate time.
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