Charltons CJC Pty Ltd v Fitzgerald

[2013] NSWSC 350

Supreme Court

New South Wales

Medium Neutral Citation:	Charltons CJC Pty Ltd v Fitzgerald [2013] NSWSC 350
Hearing dates:	9 & 10 April 2013
Decision date:	24 April 2013
Jurisdiction:	Equity Division - Expedition List
Before:	Pembroke J
Decision:	See paragraph [53]
Catchwords:	EVIDENCE - circumstantial evidence - scope and application CONTRACT - incorporation of terms by reference CONTRACT - no absence of consideration where parties agree to discharge existing contract and substitute another WAIVER - stipulated method of acceptance of offer - offeror may waive requirement for strict compliance RESTRAINT OF TRADE - width
Legislation Cited:	Civil Procedure Act 2005 (NSW) Corporations Act 2001 (Cth) Restraints of Trade Act 1976 (NSW)
Cases Cited:	Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 Banning v Wright [1972] 1 WLR 972 Belhaven and Stenton Peerage (1875) 1 App Cas 278 Blyth Chemicals Ltd v Bushnell [1933] HCA 8; (1933) 49 CLR 66 Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1 Breen v Williams [1996] HCA 57; (1996) 186 CLR 71 Chamberlain v The Queen (No 2) [1984] HCA 7; (1984) 153 CLR 521 Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 103 IR 160 Digital Pulse Pty Ltd v Harris [2002] NSWSC 33; (2002) 166 FLR 421 Dinte v Hales [2009] QSC 63 Elsley v J G Collins Insurance Agencies Limited [1978] 2 SCR 916 Figjam Pty Ltd v Pedrini [2005] NSWSC 221 Goodchild Fuel Distributors Pty Ltd v Holman (1992) 59 SASR 454 Hamilton v Whitehead [1988] HCA 65; (1988) 166 CLR 121 Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298 Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 42 Jardin v Metcash Ltd [2011] NSWCA 409 Miles v Genesys Ltd [2009] NSWCA 25; (2009) 201 IR 1 Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723 Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111 Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275 Seltsam Pty Ltd v McGuiness [2000] NSWCA 29; (2000) 49 NSWLR 262 Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 Shepherd v The Queen [1990] HCA 56; (1990) 170 CLR 573 Smith and Others v South Wales Switchgear Ltd [1978] 1 All ER 18 SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] 1 Lloyds Rep 288 Stenhouse Australia Ltd v Phillips [1973] 2 NSWLR 691; [1974] AC 391 at 699 (NSWL) 402 301 (AC) 391 Transport Industries Insurance Company Ltd v Longmuir [1997] 1 VR 125 Treacey and Others v Edwards [2000] NSWSC 846 United Group Resources Pty Ltd v Calabro (No 5) [2011] FCA 1408; (2011) 1998 FCR 514 Wessex Dairies Ltd v Smith [1935] 2 KB 80 Wigan v Edwards (1973) 1 ALR 497
Texts Cited:	Carter and Harland, Contract Law in Australia, 4th ed (2002) R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow & Lehane's Equity Doctrines and Remedies 4th ed (2002)
Category:	Principal judgment
Parties:	Charltons CJC Pty Ltd - plaintiff Alden Gregory Fitzgerald - first defendant Kamal Kishore - second defendant Kirat Krishan Prasad - third defendant Intuitive Accountants & Associates Pty Ltd - fourth defendant
Representation:	Counsel: Ian Neil SC with David Chin - for the plaintiff Peter M Kite SC with Gerard Boyce - for the first, second, third and fourth defendants Solicitors: Whittens & McKeough - for the plaintiff FCB Workplace Law - for the first, second, third and fourth defendants
File Number(s):	2012/00278861

Judgment

Introduction

1. This is a claim to restrain three former employees of an accounting firm known as 'Charltons' from breaching their contractual and fiduciary obligations to their former employer. The plaintiff also seeks damages or an account of profits arising from those breaches. The defendants admitted most but not all of the conduct of which the plaintiff complained but disputed, to varying degrees, the plaintiff's legal entitlement to relief.

1. As a preliminary observation, I should mention two matters. First, the conduct of the first, second and third defendants was characterised by dishonesty, misrepresentation and intrigue. Second, at the commencement of the hearing, senior counsel announced that none of them would give evidence. This immediately brought into play the application of the principle that Gleeson CJ and Handley JA pithily summarised in SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] 1 Lloyds Rep 288 at 293:

Where the inference of greater fault is open on the evidence we see no difficulty in drawing that more adverse inference where the defendant fails to call evidence. As Mr Justice Rich (who was part of the majority) said in Insurance Commissioner v Joyce, (1948) 77 CLR 39 at 49 where an inference is open and the defendant elects not to give evidence 'the Court is entitled to be bold'.

(emphasis added)

See also United Group Resources Pty Ltd v Calabro (No 5) [2011] FCA 1408; (2011) 198 FCR 514 at [74] - [75].

Facts

1. Until recently, the firm of Charltons has had a stable client base. Most of its clients have been with the firm for many years and the loss of clients has been minimal. The most important and valuable clients pay a regular monthly retainer to the firm. For the year ending 30 June 2012, there were about 16 retainer clients.

1. By July 2012, the first defendant (Fitzgerald), the second defendant (Kishore) and the third defendant (Prasad) had been employees of the firm for 12 or 13 years. They were all senior employees. And Kishore and Prasad were cousins. Between 2 and 27 July, Fitzgerald, Kishore and Prasad gave notice of their resignation from Charltons. On 13 July they caused a company known as Intuitive Accountants & Associates Pty Ltd (Intuitive) to be incorporated. Each of them became a director and equal shareholder of Intuitive, which was joined as the fourth defendant.

1. Shortly after 31 July, an unprecedented number of Charltons' clients terminated their retainers or otherwise ceased to be clients of the firm. From July to November, Charltons lost about 11 retainer clients representing approximately 22.5% of its gross turnover.

The Plan

1. The contemporaneous documents reveal that from at least May 2012, as part of their plan to set up a new business, Fitzgerald, Kishore and Prasad were engaged in a strategy of deception. I will not set out all the evidence, but it included the following stark and uncomplicated admissions, among many others:

(a)   On 25 and 27 May 2012 Fitzgerald sent a message to William Lawton stating 'I am also entering a new venture and may well need your input on various issues', and an email to Rodney Fitzgerald (his brother) and Tamara Fitzgerald (his daughter) attaching the previous email and stating: 'Will tell you about this sometime'.

(b)   On 30 May 2012 Fitzgerald received an email from Christopher Bellgard in which he was asked: 'How is the secret plan progressing?', to which he replies: 'on target ... but a lot of things still to accomplish'.

(c)   On 7 July 2012, using his private Yahoo email account, Fitzgerald emailed Silvana Younis (a former Charltons employee) copied to Prasad, stating: 'Kirat and Kamal would like to meet you re our 'situation' ... they will be in touch soon. I have a feeling we are going to have a great 'business' association soon ... like the old times but with greater rewards ... IMPORTANT ... only use THIS EMAIL for communication from now on'.

(d)   On 11 July 2012 Fitzgerald emailed Nolan Phillips stating: 'new company kicks off in mid August ... 3 fully qualified a/ctants, 2 consultants and two contract bookkeepers'.

(e)   On 14 July 2012 Fitzgerald emailed Carol Faulkner (a part-time bookkeeper who had worked irregularly for Charltons over many years) stating: 'Kamal/Kirat to do the 'deed' next week'.

(f)   On 21 August 2012 Judy Passlow emailed Kishore, copied to Fitzgerald and Prasad, stating 'I am so glad you are back on deck. I can't wait for Alden to arrive back too so we can 'do the deed' and get on with a new phase!'.

(emphasis added)

1. At times, Fitzgerald's enthusiasm and sense of intrigue must have got the better of him. On 15 August 2012 he sent an email to Carol Faulkner stating that he would be writing to Prasad 'for his insider's double agent view'. Prasad was the last to leave Charltons' employment - on 23 August. He had previously laid out the plans of the three defendants in an email to Silvana Younis:

I know that [Fitzgerald] has briefed you on what the overall plan is and will be nice to work with you again. We have pretty much got the ball rolling and the new business venture is not far away. Kamal and I need to catch up with you in order to get all IT software, Els lodgement, access to portal and to get remote access on separate computers plus if need be to get all insurance ready. We have at least 4 weeks timeframe to get started.

(emphasis added)

Cultivating Clients

1. The admissions made and the evidence tendered satisfy me generally that in the months leading up to their departure from Charltons, Fitzgerald and Kishore provided accounting services to persons or entities who were not existing clients of the firm; that they did not bill those persons or entities on behalf of Charltons; and that they effectively diverted from Charltons the business opportunity that those clients represented. In some instances, the work was later invoiced by Intuitive. In addition, Fitzgerald secretly performed, or arranged to perform, work for selected existing clients of Charltons. In some cases, he did not charge for these services. I am satisfied that he did so for the purpose of cultivating those clients for solicitation as clients of the new firm that he planned to establish with Kishore and Prasad.

Clients Leaving Charltons

1. After 31 July 2012, Mr Charlton received a number of letters and emails from clients terminating their association with Charltons. These included retainer clients. The departed clients represented a sizeable proportion of the firm's total billings for the year ended 30 June 2012. Contrary to the usual practice that is followed when a client terminates the services of an accountant and takes their work to another firm, Charltons did not receive a 'professional letter' from the new accountant in respect of these departed clients. A 'professional letter' is a hand-over letter from the new accountant to the old accountant, setting out the former's contact details and authorising and requesting the delivery of the client's files. It is highly unusual not to receive such a letter. In this case, the reason for the absence of such a letter was obvious.

Soliciting Clients

1. The admissions made and the evidence tendered, also satisfy me generally that after termination, Fitzgerald and Kishore assisted each other, and after 13 July 2012 - assisted Intuitive, to solicit and entice away from Charltons a significant number of existing clients of the firm. Prasad also assisted Fitzgerald, Kishore and Intuitive to achieve the same objective, but no case is made against him during the period of his employment.

Circumstantial Evidence

1. The plaintiff's submissions recognised that this was a circumstantial case. What that means is well understood. It was summarised in United Group Resources Pty Ltd v Calabro (No 5) [2011] FCA 1408 at [71] - [72] by Kerracher J, to whom what follows is substantially indebted:

(a)   Proof of any fact on the balance of probabilities may be established by circumstantial evidence: Seltsam Pty Ltd v McGuiness [2000] NSWCA 29; (2000) 49 NSWLR 262 at [90]. That includes proof of primary or intermediate facts from which the court may infer a further fact: Shepherd v The Queen [1990] HCA 56; (1990) 170 CLR 573 at 579. The primary facts can themselves be the product of inference from other facts.

(b)   A fact may be proved by inference if according to common experience the fact is the more probable inference from the unexplained primary facts. Certainty is never possible, and is not required: Transport Industries Insurance Company Ltd v Longmuir [1997] 1 VR 125 at 141. All that is necessary is that 'circumstances are proved in which it is reasonable to find a balance of probabilities in favour of the conclusion sought': Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1 at 5.

(c)   For the purpose of considering whether the probabilities are satisfied in a case based on circumstantial evidence, the Court must consider 'the accumulation of the evidence': Chamberlain v The Queen (No 2) [1984] HCA 7; (1984) 153 CLR 521 at 535. It is appropriate 'not only to evaluate each of the factual contentions separately but also to form an appreciation of the overall effect of the whole of the evidence' by considering 'the weight which is to be given to the united force of all the circumstances put together': Belhaven and Stenton Peerage (1875) 1 App Cas 278 at 279.

(d)   In a circumstantial case, the Court is often able to draw an inference from the combination of primary facts, although none of those facts in isolation would have supported the inference: Chamberlain at 536. The true picture will be derived from the accumulation of detail; often best appreciated by standing back and viewing it from a distance - making an informed, considered, qualitative appreciation of the whole; recognising that the overall effect is not necessarily the same as the sum total of the individual details. The analogy is of 'strands in a cable' rather than of 'links in a chain'. Proof does not depend on the integrity of each link: Seltsam at [90] but on the combined strength of the multifarious strands.

The Defendants' Case

1. This is such a case - to which must be added the significance of the failure of Fitzgerald, Kishore and Prasad to give evidence. Each of them swore affidavits but chose to remain silent when the hearing commenced. The consequence was that the presentation of the defendants' case was necessarily restricted. It meant that I could be more confident than I might otherwise have been about most of the factual issues. In fact, the defendants only put the plaintiff to proof on limited factual issues. Their case was largely confined to legal issues, mainly concerned with whether Fitzgerald's contract included the terms and conditions that contained the relevant contractual restraints and whether there was consideration for his 2007 contract.

Fitzgerald's Contract

1. The plaintiff contends that Fitzgerald, Kishore and Prasad were employed under written contracts of employment that contained express terms to the following effect:

(a)   that they would well and faithfully serve Chalrtons and use their best endeavours to promote the interest and welfare of Charltons;

(b)   that they would not engage in any outside employment in any way related to Charltons' business, unless they first obtained consent to do so; and

(c)   that they would not, for a period of one year after the termination of their employment, solicit or endeavour to entice away from Charltons any person or entity who 'at any time during the continuance of your employment have [sic] been a client of Charltons'.

1. The restrictive covenant that I have summarised in paragraph 13(c) above, was only one of a suite of restraints set out in Clause 7.1 of the document described as 'Terms of Employment'. Kishore and Prasad admit that they are bound by those terms but Fitzgerald denies that he is so. In his case, several discrete issues arise for consideration.

Factual Issue

1. The first issue is purely factual. Fitzgerald asserts (through his counsel) that the Terms of Employment did not in fact accompany the letter of offer to him dated 14 September 2007, which he signed on 30 October. But he was not prepared to give evidence to support the submission and the countervailing evidence enables me to draw the opposite conclusion. In 2007 Mr Charlton gave instructions that each of Charltons' then 13 employees should be given a copy of a letter of offer that was particular to them and a copy of the Terms of Employment; in 2012 a copy of the signed letter of offer was found fastened to Fitzgerald's personnel file, with a copy of the Terms of Employment physically attached to it; in 2013, when the personnel files of each of the other 12 workers employed by Charltons in 2007 were inspected, they were each found to contain copies of both the relevant employee's letter of offer and of the Terms of Employment.

1. This is quite sufficient for me to be satisfied that it is more probable than not that the Terms of Employment were provided to Fitzgerald. His failure to give evidence to deny that he received the document makes the inference of probability even easier to draw. The evidence may fall short of establishing a 'certainty' but the law in a civil case is concerned only with probabilities. In the circumstances, a conclusion that Fitzgerald did not receive the Terms of Employment would hardly be rational.

Incorporation by Reference

1. In any event, the letter of offer to Fitzgerald, as well as those to each other relevant employee, clearly incorporated by reference the document containing the Terms of Employment. The incorporation occurred whether or not that document was physically attached to the letter and regardless of whether it was seen by Fitzgerald. Whether a document is incorporated by reference is a question of construction. In effect, the court asks 'What did the parties agree to?' The approach to the resolution of that question requires the application of conventional principles. If the incorporated document is clearly identified, if the language of incorporation is clear, and if the objective intention of the parties is readily discernible, the court will usually be satisfied that the extraneous document has been incorporated: see generally: Smith v South Wales Switchgear Ltd [1978] 1 All ER 18 at 29-30 (HL); Treacey and Others v Edwards [2000] NSWSC 846 at [33].

1. In this case, the second sentence of the letter stated that if Fitzgerald accepted the offer contained in it, his employment contract would include the Charltons 'Terms of Employment'. The third sentence stated that the Terms of Employment contained various undertakings with respect to non-competition and that the addressee of the letter should 'take the time required to read carefully all the documents'. On the last page of the letter, Fitzgerald signed and dated the letter below the following statement:

I hereby accept the above terms and conditions of employment with Charltons.

1. The phrase 'the above terms and conditions of employment' clearly refers to and includes the Charltons 'Terms of Employment' to which the letter gave explicit attention. I do not read it as limited only to the particular matters set out in the letter. It is true that the letter set out some of the most important elements of the contract of employment, but it also emphasised that the 'Terms of Employment' contained significant undertakings that the employee should take the time to consider. I am satisfied on the proper construction of the letter of offer that the objective intention of the parties was that the Terms of Employment be incorporated into the new contract that came into existence when Fitzgerald signed and returned the letter of offer.

Failure to Initial Terms

1. The second issue concerned the method of acceptance. Each letter of offer stated that if the employee wished to accept the offer of employment, he 'must initial each page of the Terms' and 'deliver the initialled Terms, and the counterpart signed copy of the letter, to Charltons within seven days of the date of this letter'. The evidence is that Fitzgerald signed the counterpart letter of offer but did not deliver it to Charltons 'within seven days of the date of this letter'. Nor did he initial each page of the Terms of Employment. And Mr Charlton did not insist on him doing so. Nor did he take any point based on the late delivery. After receipt of the letter of offer, Fitzgerald did not raise with Mr Charlton any aspect of the letter or the Terms of Employment. And his employment with the firm continued for the next five years until 2012.

1. In the circumstances, the plaintiff clearly waived the requirement that Fitzgerald initial each page of the Terms of Employment and return the signed and initialled documents within seven days. The initialling requirement was for the plaintiff's benefit, not for Fitzgerald's benefit. The fact of initialling each page minimised the likelihood that the employee might later dispute the terms of his contractual obligations. This was potentially important, especially in circumstances where those obligations included restrictive covenants on the employee's future work.

1. Even if, on its proper construction, the method of acceptance prescribed in the letter of offer was exclusive - so that no other method was intended to be sufficient - it was always open to Charltons, as offeror, to refrain from insisting on strict compliance. That it might choose to do so in the case of a senior and trusted employee is perfectly understandable. There was no indication of unhappiness between Fitzgerald and Mr Charlton in 2007 and no reason to think that they were not in complete agreement. If Mr Charlton did not wish to require Fitzgerald to comply with every detail of his own somewhat didactic method of acceptance, it was his prerogative to do so. The defendants' submission that Mr Charlton's failure to insist on strict compliance with his own stipulated acceptance procedure had the legal effect of ensuring that no new contract came into existence, introduces an unfortunate level of artificiality to what is in reality a common practical situation.

1. Whether one characterises the events that occurred as giving rise to a waiver, election or estoppel, it is clear that, if the boot were on the other foot, the plaintiff could not now contend that there was no contract because Fitzgerald had not initialled each page of the Terms of Employment. Similarly, there is no basis for Fitzgerald contending that no contract was brought into existence. As Lord Hailsham LC said in Banning v Wright [1972] 1 WLR 972 at 978-9:

The primary meaning of the word 'waiver' in legal parlance is the abandonment of a right in such a way that the other party is entitled to plead the abandonment by way of confession and avoidance if the right is thereafter asserted.

Consideration

1. A third issue arises because Fitzgerald contends that the Terms of Employment, or at least the restraints imposed on him by Clause 7.1, are not binding by reason of the absence of valuable consideration. This is an exercise in false reasoning. As at September 2007, Fitzgerald was bound by an existing contract of employment with Charltons. Mr Charlton effectively proposed, and Fitzgerald agreed, that the existing contract be discharged and replaced by a further more extensive contract. The replacement contract addressed a number of topics that constituted a new and different subject matter. They were set out in Clauses 10, 11, 12 and 13 of the Terms of Employment.

1. Although Fitzgerald's remuneration and responsibilities may have remained unchanged, the substitute contract dealt with new aspects of the employment relationship in ways that secured a 'practical benefit' or avoided some practical detriment or disadvantage to either or both parties, cf. the ungainly expression 'practical disbenefit' in Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723 at 746-747.

1. In any event, as a matter of legal analysis, whenever parties agree to discharge an existing contract and replace it, their mutual promises to discharge the original agreement and abide by the new agreement will constitute sufficient consideration - unless their conduct is simply an artifice. The point was stated succinctly in Figjam Pty Ltd v Pedrini [2005] NSWSC 221 at [15]:

[I]f the existing duty is discharged by a contract which includes a promise with the same content as the original promise, the promise will be regarded as binding because consideration is present in the parties' agreement that the original duty is to be discharged ... Unless the circumstances are such that it is impossible to interpret the second contract as a termination of the first, a court will discern an implied agreement to terminate the original contract and consideration will be present.

1. That passage had its origin in Carter and Harland, Contract Law in Australia, 4 ed (2002) at 347:

Termination of the Contract. The principle that a promise to perform a contractual obligation already owed to the other party is no consideration for a return promise by the latter has no application where the earlier obligation is, as part of the agreement, terminated or discharged. In other words, if the existing duty is discharged by a contract which includes a promise with the same content as the original promise, the promise will be regarded as binding because consideration is present in the parties' agreement that the original duty is to be discharged ... Unless the circumstances are such that it is impossible to interpret the second contract as a termination of the first, a court will discern an implied agreement to terminate the original contract and consideration will be present.

(emphasis added)

1. I adopt that analysis. The 2007 letter of offer and the Terms of Employment were explicitly intended to constitute a new contract. The general statement by Mason J in Wigan v Edwards (1973) 1 ALR 497 at 512 is not to the point. His Honour's observations relate to promises made under an existing contract. They are not concerned with the legal effect of the discharge of a contract and its replacement by a new contract. In my view, there is no sound basis for the contention that Fitzgerald's 2007 contract was not supported by consideration.

Width of Restraint

1. The next issue is whether the restraints imposed by Clause 7.1 of the Terms of Employment are 'no more than reasonable to protect the legitimate interests of the plaintiff'. The defendants contend that the restraints are excessive and therefore contrary to public policy and void. Alternatively, they contend that they should be read down pursuant to Section 4 of the Restraints of Trade Act.

1. Clause 7.1(3)(a) of the Terms of Employment restrains Fitzgerald, Kishore and Prasad from, among other things, soliciting persons or entities 'who at any time during the continuance of your employment have [sic] been a client of' the firm. The employment of each of them with Charltons commenced in 1999. The number of persons or entities, including former clients of the firm, who may therefore be caught by Clause 7.1 is considerable. It may include persons or entities who ceased to be clients of the firm more than a decade ago. The evidence does not disclose, in all cases, who has been a client of the plaintiff since 1999; whether they continue to be a client; when or if they ceased to be a client; and whether any such client has ever had dealings with Fitzgerald, Kishore or Prasad. The practical commercial necessity for the wide protection provided by Clause 7.1 is opaque; its justification imperspicuous.

1. The defendants understandably contend that the definition of 'client' under the restraints should be limited. They submit that reasonableness requires that 'client' be confined to persons or entities with whom each of the defendants, as the case may be, 'had direct dealings during the last twelve months of his employment with the plaintiff'.

1. The defendants are justified in their challenge to the width of the contractual restraint. In my view, the restraints are wider than is necessary for the reasonable protection of the legitimate interests of the plaintiff. An accounting firm such as Charltons undoubtedly has a valid interest in the protection of its customer connection: Stenhouse Australia Ltd v Phillips [1973] 2 NSWLR 691 at 699; [1974] AC 391 at 402; Miles v Genesys Ltd [2009] NSWCA 25; (2009) 201 IR 1 at [41]; Jardin v Metcash Ltd [2011] NSWCA 409 at [95]; Elsley v J G Collins Insurance Agencies Limited [1978] 2 SCR 916 at 925-938; Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111 at [47]. But I have concluded in this case that the plaintiff's legitimate interest will be served if the restraints are limited to persons or entities with whom any of Fitzgerald, Kishore and Prasad had dealings in the last twelve months of their employment.

1. I do not accept that the qualification 'direct dealings' is necessary. That will only lead to argument, disputation and uncertainty about what was, in a particular case, a 'direct dealing'. The nature of the connection between Fitzgerald, Kishore and Prasad and the clients of the firm to whose accounts they were assigned, does not justify the width of the restriction stipulated by Clause 7.1. Unless read down, it could operate unfairly, randomly and have consequences that do not serve the legitimate interests of the plaintiff.

1. Fitzgerald, Kishore and Prasad should be restrained from, among other things, soliciting any person or entity with whom they had dealings on behalf of the firm in their last twelve months of employment. I am confident that such a restriction will provide adequate protection to the plaintiff. Anything more would go beyond what is reasonable.

Duty of Fidelity

1. During their employment with Charltons, Fitzgerald, Kishore and Prasad were subject to an express contractual duty of fidelity. Clause 3.1 of the Terms of Employment required them to 'well and faithfully serve [the plaintiff] and use your best endeavours to promote the interest and welfare of [the plaintiff].

1. A term to similar effect is implied by operation of law in every contract of employment unless it is directly or indirectly excluded. It obliges the employee to render faithful and loyal service to the employer and to avoid conduct incompatible with the continuing relationship of trust and confidence between them: Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 at 370, 372, 391, cited in Blyth Chemicals Ltd v Bushnell [1933] HCA 8; (1933) 49 CLR 66 at 81-82 (Dixon and McTiernan JJ); see also Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 103 IR 160 at [57] (Kirby J).

1. The breadth and generality of the duty of fidelity was encapsulated in the statement of principle in Blyth Chemicals Ltd v Bushnell at 81-82 where, in addressing the circumstances in which summary dismissal is justified, Dixon and McTiernan JJ said:

Conduct which in respect of important matters is incompatible with the fulfilment of an employee's duty, or involves an opposition, or conflict between his interest and his duty to his employer, or impedes the faithful performance of his obligations, or is destructive of the necessary confidence between employer and employee, is a ground of dismissal ... But the conduct of the employee must itself involve the incompatibility, conflict, or impediment, or be destructive of confidence. An actual repugnance between his acts and his relationship must be found. It is not enough that ground for uneasiness as to future conduct arises.

1. The contractual duty of fidelity, whether express as in Clause 3.1, or implied, prevents an employee from undermining the employer's business, such as by soliciting or procuring the employer's customers and employees, diverting the employer's business opportunities to their own business, or setting up, operating or assisting a business which competes with their employer: Blyth Chemicals v Bushnell at 81-82; Wessex Dairies Ltd v Smith [1935] 2 KB 80 at 87-89; Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275 at 300; Goodchild Fuel Distributors Pty Ltd v Holman (1992) 59 SASR 454 at 477-481 and 484-485; Digital Pulse Pty Ltd v Harris [2002] NSWSC 33; (2002) 166 FLR 421 at [20] - [23] (not relevantly reversed on appeal in Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298); Dinte v Hales [2009] QSC 63 at [22] - [26].

1. In this case, there is no need to resort to the implied duty of fidelity. The express contractual obligation in Clause 3.1 of the Terms of Employment, achieves the protection which the plaintiff seeks, and the implied duty adds nothing. An implied term should only be found if, among other things, it is 'necessary'. See Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 at 124 (CA).

Fiduciary Obligation of Loyalty

1. During their employment with the firm, Fitzgerald, Kishore and Prasad also owed to the plaintiff a fiduciary obligation of loyalty. The fiduciary character of the employment relationship is well recognised. See for example, Digital Pulse Pty Ltd v Harris at [20], and on appeal in Harris v Digital Pulse Pty Ltd at [121].

1. Fitzgerald, Kishore and Prasad were relevantly obliged to subordinate their interests to Charltons: Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at 96-97; Concut Pty Ltd v Worrell at [17]. This is manifested in two proscriptive obligations: (1) not to be in a position of conflict between their duty and their personal interest, and (2) not to obtain any unauthorised benefit from their fiduciary position: Breen v Williams [1996] HCA 57; (1996) 186 CLR 71 at 113; and Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 198.

1. Fiduciary and contractual obligations do not always make easy bedfellows however. The express contractual duty of fidelity in Clause 3.1 of the Terms of Employment provides all the protection that the plaintiff could hope to achieve. The concurrent fiduciary duty adds nothing. That is because it is the contractual relationship which is all important. The fiduciary relationship 'must accommodate itself to the terms of the contract so that it is consistent with, and conforms to them': Hospital Products Ltd v United States Surgical Corporation at 97 (Mason J). To similar effect was Lord Browne-Wilkinson in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 at 206 who observed:

... the extent and nature of any fiduciary duty owed in a particular case falls to be determined by reference to any underlying contractual relationship between the parties.

1. For those reasons, the fiduciary obligation of loyalty owed by Fitzgerald, Kishore and Prasad during their employment, rose no higher than their contractual duty. It was equivalent to and existed concurrently with the duty set out in clause 3.1 of the Terms of Employment.

Contractual Obligations After Employment

After the termination of their employment, the only restraint on the conduct of Fitzgerald, Kishore and Prasad was that imposed by Clause 7.1 of the Terms of Employment - subject to the reading down of that provision in the way that I explained in paragraph [34] above. Clauses 7.1(3)(a) and (b) are covenants against solicitation. Clauses 7.1(3)(c) and (d) are covenants against competition. Clause 7.1(3)(e) is a hybrid covenant, being a covenant against assisting anyone else to solicit or compete. Those provisions have all been breached.

Intuitive

1. The claim against Intuitive appears to raise no contentious issue of fact or principle. The defendants' written submissions contain almost nothing on the topic. Intuitive's corporate knowledge of the terms of the contracts of employment of Fitzgerald, Kishore and Prasad can be readily inferred. It had the same actual knowledge as each of them: Hamilton v Whitehead [1988] HCA 65; (1988) 166 CLR 121 at 127.

1. In fact, the four defendants clearly acted in combination. Fitzgerald, Kishore and Prasad assisted Intuitive and Intuitive assisted each of them. Where each of Fitzgerald, Kishore and Prasad is individually liable for some identified breach that has been admitted or proved, Intuitive should also be liable for that breach.

Corporations Act Duties

1. Finally, the plaintiff pleaded, but did not address, the issue of breaches of Sections 182 and 182 of the Corporations Act. For the brief reasons set out in the defendants' written submissions, I am not satisfied that these breaches have been established.

Breaches & Damages

1. As well as seeking to restrain Fitzgerald, Kishore and Prasad from acting in contravention of Clause 7.1 of the Terms of Employment for the full twelve month period after the termination of their employment, the plaintiff has a practical commercial interest in securing monetary compensation from them, and from the company which they established together.

1. However, before the amount of monetary compensation can be determined, senior counsel informed me that it will be necessary, in relation to part of the claim, for the plaintiff to elect between damages and an account of profits. No election can yet be made and any choice between an account of profits and damages may raise a number of issues.

1. The calculation of damages for breach of the restraints stipulated in Clause 7.1 of the Terms of Employment is governed by the formula set out in Clause 7.2. It requires identification of 'the client', which in turn necessitates the identification of individual breaches. That process of identification will be affected by my conclusion that Clause 7.1 should be read down so as to limit its application only to 'clients' with whom Fitzgerald, Kishore and Prasad had dealings in the twelve month period prior to the termination of their employment. The defendants' written submissions acknowledged the need for the court to make findings about the existence and scope of the restraints imposed by Clause 7.1, before they would be in a position to make admissions as to breach. They also reserved their right to make submissions as to the validity of Clause 7.2.

1. Despite those qualifications, the defendants cooperated in the production of schedules in which, among other things, they admitted a large number of post-employment breaches of Clause 7.1. However the admissions assume the application of Clause 7.1 in the form appearing in the Terms of Employment - not as read down by me. The outcome may well be different given that I have found that the Clause 7.1 restraints should apply only to persons or entities with whom Fitzgerald, Kishore and Prasad had dealings in the twelve month period before the termination of their employment.

1. The same complication does not arise in relation to the contractual and fiduciary breaches by Fitzgerald and Kishore during their employment. In that respect, the schedules of breaches produced by the parties are divided between those that relate to actual clients of Charltons - for which Fitzgerald alone is said to be liable, and those that relate to 'shadow clients' of Charltons - for which Fitzgerald and Kishore are both said to be liable. Fortunately, the admissions are numerous and the denials relatively few - although their resolution is not without complication.

Further Hearing

1. It will, I think, serve the interests of justice best, if I reserve for further hearing the remaining issues requiring the precise identification of individual breaches, and the consequential calculation of damages or profits flowing from each breach. A further 'damages' hearing will have to take place in any event. It will assist me in resolving any remaining differences as to whether particular breaches have occurred, if I knew the precise amount of damage or lost profits, as the plaintiff may elect, that is attributable to each breach. This is partly a pragmatic consideration. But the exercise of doing so may also focus the parties' minds on the utility of pursuing or contesting all of the residual differences that currently appear in the schedules of breaches. I need not remind the parties and their legal representatives that they have a statutory duty to assist the court to achieve the overriding purpose of the Civil Procedure Act and the Rules. The performance of that duty requires sensible cooperation, restraint and sound judgment. The economical resolution of the remaining issues demands such conduct by the parties.

Conclusion

1. I will adjourn the further hearing of these proceedings to a date to be fixed. The matter will be listed for directions before me on Friday, 3 May 2013 for the purpose of allocating a further date and making any further directions that may be necessary. As I have concluded that Clause 7.1 of the Terms of Employment should be read down, it is appropriate that any costs order reflect that modest success by the defendants. The defendants should therefore pay 80% of the plaintiff's costs of the proceedings to date. Those costs may be assessed forthwith.

Decision last updated: 24 April 2013