Bulk Frozen Foods Pty Ltd v Excell
[2014] TASSC 58
•3 November 2014
[2014] TASSC 58
COURT: SUPREME COURT OF TASMANIA
CITATION: Bulk Frozen Foods Pty Ltd v Excell [2014] TASSC 58
PARTIES: BULK FROZEN FOODS PTY LTD
v
EXCELL, Kim David
FILE NO: 869/2014
DELIVERED ON: 3 November 2014
DELIVERED AT: Hobart
HEARING DATE: 29 October 2014
JUDGMENT OF: Blow CJ
CATCHWORDS:
Trade and Commerce – Other regulation of trade or commerce – Restraints of trade – Validity and reasonableness – Particular cases – Employment – Covenants restricting work after cessation of employment – Protection of confidential information – Whether covenants void for uncertainty or unreasonableness.
JQAT Pty Ltd v Storm [1987] 2 Qd R 162; Hanna v OAMPS Insurance Brokers Ltd (2010) 202 IR 420, applied.
Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505; Workpac Pty Ltd v Steel Cap Recruitment Pty Ltd (2008) 176 IR 464, referred to.
Aust Dig Trade and Commerce [1216]
REPRESENTATION:
Counsel:
Plaintiff: B R McTaggart SC, R Foon
Defendant: A G Melick SC, C Scott
Solicitors:
Plaintiff: Douglas & Collins
Defendant: Yvonne Pagett & Co
Judgment Number: [2014] TASSC 58
Number of paragraphs: 22
Serial No 58/2014
File No 869/2014
BULK FROZEN FOODS PTY LTD v KIM DAVID EXCELL
REASONS FOR DETERMINATION BLOW CJ
3 November 2014
This action concerns an employment contract entered into in April 2013 between the plaintiff, Bulk Frozen Foods Pty Ltd, and the defendant, Kim Excell. The plaintiff is a wholesaler and retailer of food and related items. The defendant was employed as general manager of the food service wholesale and retail operations of the plaintiff company in southern Tasmania. On 17 September 2014 he resigned from his employment in order to take up employment with a competitor of the plaintiff. The employment contract with the plaintiff contains clauses restricting him in relation to the taking up of other employment, and requiring him not to use or disclose any of the plaintiff's confidential information.
In this action the plaintiff is seeking a declaration that the relevant provisions of the employment contract are valid and enforceable, an injunction restraining the defendant from contravening certain provisions of that contract, and an order for the delivery up of all property belonging to the plaintiff that is in the defendant's possession or control. It was decided that the action would go to trial without pleadings, and be tried on affidavit. At the commencement of the trial, counsel asked me to determine, as a preliminary issue, whether cl 8.3(b) of the employment agreement is void. That is the clause that restricts the defendant in relation to the taking up of other employment. The defendant contended that the clause was void at common law for both uncertainty and unreasonableness. On 30 October 2014 I determined that the clause was not void for uncertainty, and was not wholly void for unreasonableness. I left open the question whether some of the covenants embodied in that clause were void for unreasonableness. These are my reasons for that determination.
Clause 8.3(b) reads as follows:
"(b)The Employee covenants with the Employer that the Employee will not carry on or be engaged, concerned or interested, directly or indirectly, in the capacity specified in para (A) in the business specified in para (B) within the area specified in para (C) for the period specified in para (D).
(A) As:
(i)sole trader;
(ii)partner;
(iii)director or shareholder;
(iv)manager;
(v)employee;
(vi)agent; or
(vii)consultant.
(B) The supply of foods of a similar kind to the business of the employer
(i)Sale by wholesale of frozen foods
(ii)Sale by wholesale of chilled foods
(iii)Sale by wholesale of ambient foods
(iv)Sale by wholesale of fresh produce
(v)Sale by wholesale of meat
(vi)Sale by wholesale of seafood
(vii)Sale by wholesale of any product in competition with the employer
(viii)Sale of frozen food products in competition with the employer
(ix)Sale of chilled food products in competition with the employer
(x)Sale of ambient food products in competition with the employer
(xi)Sale of fresh food products in competition with the employer
(xii)Sale of meat in competition with the employer
(xiii)Sale of seafood in competition with the employer
(xiv)Sale of any food product in competition with the employer
(xv)Sale (either direct or indirect) of goods which are the same or similar to goods sold by the employer and which compete with or adversely affect the sales of the employer.
(C) Within the following areas:
(i)the Telstra 0362 area as defined at the commencement date of this contract.
(ii)the Telstra 0363 area as defined at the commencement date of this contract.
(iii)the Telstra 0364 area as defined at the commencement date of this contract.
(iv)50 kilometres of the Launceston Post Office
(v)100 kilometres of the Launceston Post Office
(vi)50 kilometres of the Burnie Post Office
(vii)100 kilometres of the Burnie Post Office
(viii)50 kilometres of the Hobart Post Office
(ix)100 kilometres of the Hobart Post Office
(x)50 kilometres of the Devonport Post Office
(xi)100 kilometres of the Devonport Post Office
(xii)50 kilometres of the Queenstown Post Office
(xiii)100 kilometres of the Queenstown Post Office
(D)During the period after leaving this employment by the Employer: as specified in the schedule at Item 8."
Although par (D) refers to "the period", Item 8 of the schedule to the agreement sets out a list of six periods. However words importing the singular include the plural, both by virtue of par (f) of a provision headed "Interpretation" in cl 1 of the agreement, and by virtue of s 64(c) of the Conveyancing and Law of Property Act 1884, which applies to all contracts unless a contrary intention appears. The meaning of Item 8 in the schedule to the agreement is quite clear, though it appears that its author had only a very limited grasp of Roman numerals and of the English language. The item reads as follows:
"(i) Months; one
(ii) Months; two
(iii) Months; three
(iv) Months; four
(iiv) Months; five
(iiiv) Months; six".
Uncertainty
The clause in question, cl 8.2(b), is followed immediately by severance provisions, cl 8.2(c), (d) and (e), which read as follows:
"(c)The Employee separately enters into each of the covenants resulting from combining separately each of the capacities in para (A) with each business or activity (if more than one) in para (B), with each geographical area in para (C), with each period in para (D), with the Employer.
(d)Each of these covenants constitutes an independent and separate restraint imposed on the Employee under this agreement.
(e)If any of those covenants is or will become unenforceable, that does not affect the validity and enforceability of the other covenants imposed under this clause, which remain binding on the Employee."
The result, as pointed out by senior counsel for the defendant, is that the parties entered into not one covenant, but 8,190 separate covenants. That figure is calculated by multiplying together the number of specified capacities (7), the number of specified businesses or activities (15), the number of specified areas (13), and the number of periods (6): 7 x 15 x 13 x 6 = 8,190.
The validity of a similarly structured restraint clause was considered by the Full Court of the Supreme Court of Queensland in JQAT Pty Ltd v Storm [1987] 2 Qd R 162. The clause in question in that case gave rise to only 18 possible combinations. It specified three types of activity, three periods of differing lengths, and two non-overlapping areas. The Full Court unanimously held that the clause was not void for uncertainty. The principal judgment was written by Connolly J, with whose reasons Williams and Ambrose JJ generally agreed. Connolly J said the following at 164:
"It is true that the obligations the subject of the notional subclauses will overlap but that does not make them inconsistent if it is proper to regard them as cumulative. The fact that the obligations are imposed on the former employee by a series of overlapping covenants does not mean that the obligations are uncertain. He is subject to all eighteen, as a matter of construction. …
… in my view, the provisions reveal an intention to restrain the former employee in relation to the widest range of behaviour, locality and time which can be derived from its provisions. The possibility that a particular situation may bring into play the law relating to restraint of trade is faced but the primary intention is to oblige the former employee in the terms I have stated, the parties expressing a continued willingness to be bound should the Court hold that there is in some respect an unlawful restraint."
A similarly structured clause in a contract for the sale of a shipbuilding business was considered by Spender J in Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505. His Honour considered a line of cases in which covenants were held to be void for uncertainty when the parties were leaving it to the courts to decide the extent of the covenantors' obligations without having agreed upon the extent of such obligations themselves: Davies v Davies (1887) 36 Ch D 359; Peters Ice Cream (Vic) Ltd v Todd [1961] VR 485; Austra Tanks Pty Ltd v Running [1982] 2 NSWLR 840. Although the clause in question gave rise to 120 different combinations, there was a clause requiring each combination to be treated as a severable covenant. Spender J applied JQATv Storm, and held that the clause was not void. At 522-523 he said:
"It seems to me to be very much a question of degree and dependent on the parameters of each such attempt, whether in truth the court is being asked to choose the extent of the restraint.
In my opinion, the question whether a technique of defining covenants in restraint of trade by combining different variables of conduct, time and space, and providing that each of the covenants so 'generated' is subject to severance, is successful in defining enforceable restraints or is unsuccessful in so doing, comes down to whether the exercise amounts to a genuine attempt to define the covenantee's need for protection, with the agreement as to severance as a precaution against the 'all or nothing' nature of the court's tests for reasonableness, or whether the exercise is simply one where the parties have left to the court the task of making their contract for them.
One might think the more numerous the variables, and the more mechanical and indiscriminate the combinations of variables, the more likely would be a conclusion that the exercise is of the latter kind."
In Hanna v OAMPS Insurance Brokers Ltd (2010) 202 IR 420, the New South Wales Court of Appeal considered the validity of a restraint clause in an employment contract that contained a severability provision and gave rise to nine separate covenants by reference to activities, periods and areas. It was held unanimously that the clause was not void. Allsop P (as he then was), with whom Hodgson JA and Handley AJA agreed, applied JQAT Pty Ltd v Storm, and cited Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd with approval. At [12] he rejected an argument that, for such a clause to be valid, there was a "legal requirement for a hierarchy of the clauses and a mechanism for their order of operation". At [13] his Honour said:
"It may be that a complex and difficult clause with multiple permutations and combinations would be so impenetrable as to lack coherent meaning and be uncertain. That is not the case here."
In Workpac Pty Ltd v Steel Cap Recruitment Pty Ltd (2008) 176 IR 464, Templeman J, in the Supreme Court of Western Australia, refused an application for an interlocutory injunction to enforce similar restraint provisions in three employment contracts. The contracts contained severance provisions. The restraint clause in each contract, if valid, gave rise to 40 separate covenants, based on 10 different areas and 4 different periods of restraint. In assessing the strength of the plaintiff's case, his Honour said, at [46]:
"… I consider that there is considerable merit in the submission made by counsel for the defendants … that the provisions do not reflect a genuine attempt to define the plaintiff's need for protection. If that was the conclusion reached at trial, the court would not sever the restraint of trade provisions, which would therefore be uncertain and hence, unenforceable."
In that case the plaintiff carried on the business of a recruitment agency, and sought injunctions against three former employees. It seems likely that his Honour regarded as very significant the variation between the narrowest and widest of the covenants to which the clause gave rise. The narrowest would have prevented an employee from working in or carrying on a similar business within five kilometres of the Workpac office where he or she had been based, for a period of three months after the termination of his or her employment. The widest covenant would have imposed a similar restraint for a period of 12 months within a radius of 500 kilometres of each of Workpac's 26 offices at various places in mainland Australia.
In the present case, it seems clear that the parties sought to impose a restraint which would apply for no more than six months, which would cover the whole of Tasmania, and which would prevent the defendant from working for or being involved in any business competing with the plaintiff's business, subject to, in the words of Connolly J, "the parties expressing a continued willingness to be bound should the Court hold that there is in some respect an unlawful restraint". Because of that willingness, Item 8 in the schedule to the contract made provision for a cascading series of time restraints. And cl 8.2(b)(C) split Tasmania into three telephone districts, added fall-back provisions relating to areas within 100 kilometres of five different post offices, and added further fall-back provisions relating to areas within 50 kilometres of the same five post offices. Similarly, cl 8.2(b)(A) listed seven different capacities in which the defendant might be involved with a competitor, and cl 8.2(b)(B) listed 15 different categories of sale activities, some mutually exclusive, some subsets of others, and some overlapping. Although the result is a very large number of combinations, I think the clause should be regarded as, in the words of Spender J, "a genuine attempt to define the covenantee's need for protection, with the agreement as to severance as a precaution against the 'all or nothing' nature of the court's tests for reasonableness".
For these reasons, I determined that cl 8.2(b) was not void for uncertainty.
Unreasonableness
Counsel for the defendant submitted that cl 8.2(b) was wholly void for unreasonableness. Counsel for the plaintiff submitted that it was not. No submissions were made as to the extent of the covenantor's obligations if the clause was held to be too wide but not wholly void. I therefore considered only the issue whether it was wholly void. Having determined that it was not wholly void, I left open the question whether it was too wide in one or more respects.
The fundamental common law principles in relation to the reasonableness issue are as stated by Lord Macnaghten in Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 at 565, in the following passage:
"All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification and indeed it is the only justification and indeed it is the only justification, if the restriction is reasonable – reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed while at the same time it is no way injurious to the public."
That passage has often been cited with approval, particularly in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269 at 299, 307 and 318; in Buckley v Tutty (1972) 125 CLR 353 at 376; and in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 315.
A restraint of trade will only be valid if the covenantee has some property or interest that can be protected, such as confidential information or trade secrets: Bacchus Marsh Concentrated Milk Co Ltd v Joseph Nathan & Co Ltd (1919) 26 CLR 410 at 440-441; KA & C Smith Pty Ltd v Ward (1998) 45 NSWLR 702 at 723. The general skill and knowledge that a person acquires in his or her work does not amount to property and will not be protected: Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 711; Bacchus Marsh Concentrated Milk Co Ltd v Joseph Nathan & Co Ltd (above) at 441.
In the 17 months that the defendant worked for the plaintiff as a manager, he was routinely provided with information as to the company's customers, what products they bought, what quantities they bought, what prices they paid, and the plaintiff's profit margins. Although he managed one of three food service branches of the company, he was routinely provided with such information in relation to all of those branches. He was also provided with information as to the wages and conditions of the plaintiff's employees, and the prices paid by the plaintiff for merchandise after deals, rebates and discounts. He was provided with information as to the plaintiff's individual sales representatives' weekly and yearly sales figures and profit margins, and information as to the expenses of each of the plaintiff's food service branches. All of the information that I have referred to can properly be regarded as confidential information belonging to the plaintiff, knowledge of which could be used to the advantage of a competitor and to the detriment of the plaintiff's business.
There is unchallenged evidence that the plaintiff stocks over 6,000 products, and has some 24 competitors, some of them competing in relation to many types of products, and others in relation to comparatively few.
The reasonableness or otherwise of a restraint of trade must be judged by reference to the circumstances at the time of the contract: Lindner v Murdock's Garage (1950) 83 CLR 628 at 653. I inferred that the circumstances as to the provision of information to managers within the plaintiff company and as to its competitors was much the same when the contract was entered into in April 2013 as they are now. I was satisfied that the plaintiff had confidential information that could reasonably be protected by a restraint of trade provision in a contract of employment.
It followed that cl 8.2(b) is not void if any one of the 8,190 severable covenants was reasonable. That issue can be tested by taking one of the least onerous covenants as an example. Amongst other things, the defendant covenanted not to be engaged as a manager in a business that sold frozen foods by wholesale within 50 kilometres of the "Hobart Post Office" for a period of "Months; one". Having regard to the evidence as to the plaintiff's business, the nature of the confidential information provided to the defendant, and the plaintiff's competitors, that covenant could only be regarded as reasonable.
For these reasons, I determined that cl 8.2(b) was not wholly void for unreasonableness.
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