Commsupport Pty Ltd v Mirow
[2018] QDC 134
•03 August 2018
DISTRICT COURT OF QUEENSLAND
CITATION:
Commsupport Pty Ltd v Mirow [2018] QDC 134
PARTIES:
Commsupport Pty Ltd ACN107169648
(plaintiff)v
Nathan Mark Mulligan
(first defendant)Kurt Michael Mirow
(second defendant)FILE NO/S:
TD33/2015
DIVISION:
Civil
PROCEEDING:
Trial
ORIGINATING COURT:
Toowoomba
DELIVERED ON:
03 August 2018
DELIVERED AT:
Brisbane
HEARING DATE:
28 February, 1, 2 March and 6, 7 April 2017
JUDGE:
Horneman-Wren SC DCJ
ORDER:
1. The plaintiff’s claim is dismissed.
2. The parties make written submissions on costs within 14 days
CATCHWORDS:
EMPLOYMENT – EMPLOYER AND EMPLOYEE – CONTRACT OF EMPLOYMENT – TRADE AND COMMERCE – OTHER REGULATION OF TRADE OR COMMERCE – RESTRAINTS OF TRADE – VALIDITY AND REASONABLENESS – proper construction of restrain covenants in employment contract – where 3 month restraints capture all clients in the 6 months immediately preceding termination – where on the evidence the defendant could not possibly have had interactions with all those clients the subject of the 6 month range so as to develop the requisite and protectable customer connection – where inequality of bargaining position between the parties at the time of contract – whether restraints reasonable by reference to its scope – whether restraints supported by consideration – whether former employee breached restraints
TRADE AND COMMERCE – OTHER REGULATION OF TRADE OR COMMERCE – RESTRAINTS OF TRADE – ROLE OF PUBLIC INTEREST OR POLICY – whether restraints exceeded a legitimate protectable interest of the employer so as to offended the public interest in competition
TRADE AND COMMERCE – OTHER REGULATION OF TRADE OR COMMERCE – RESTRAINTS OF TRADE – ENFORCEMENT OF AGREEMENT – REMEDIES FOR BREACH OF AGREEMENT – DAMAGES – assessment of damages – where probability of future events occurring considered – applicable assessment regime
CASES:
AGA Australia Pty Ltd v Tokody [2012] QSC 176
Amaco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288
Artcraft v Chandler [2003] QSC 102
Arthur Murray Dance Studios of Cleveland Inc v Witter 105 NE 2d 685 at 705 (Ohio) CP 1952
A Schroedar Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616
Brinks v Cain [2007] NSWSC 62
Buckley v Tuffy (1972) 125 CLR 353
Burton & Eising v Wright Trading Pty Ltd [2007] QSC 17
Byrne v Australia Airlines Ltd (1995) 185 CLR 410
Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717
Charltons CJC Pty Ltd v Fitzgerald (No 3) [2013] NSWSC 1945
Clarke v Newland [1991] 1 All ER 397
Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64
Electro Board Administration v O’Brien [1999] NSWCA 452
Electricity Generation Corporation v Woodside Energy Ltd & Ors [2014] 251 CLR 640
Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269
Dews v Fitch [1920] 2 CH 159
Geraghty v Minter (1979) 142 CLR 177
GW Plowman & Son Ltd v Ash [1964] 1 All ER 10
Hadley v Baxendale (1854) 9 Ex 431Harlow Property Consultants Pty Ltd v Byford [2005] NSWSC 658
Haynes v Doman [1899] 2 CH 13
Herbert Morris Limited v Saxelby [1916] AC 688
HRX Holdings Pty Ltd v Pearson [2012] FCA 161Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449
Jones v Schiffmann (1971) 124 CLR 303
Lindner v Murdoch’s Garage (1950) 83 CLR 628
Malec v J C Hutton Pty Ltd (1990) 169 CLR 638
Mills v Dunham [1891] 1 CH 576
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] 256 CLR 104
NF Perry Pty Ltd (2002) 84 SA SR 86
Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535
Peters Ltd (WA) v Petersville Ltd (2001) 205 CLR 126
Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 196 ALR 257
Quinn v Jack Chia (Australia) Ltd [1992] 1 VR 567
Rannie v Irvine [1844] 7 MAN & G 969
Robinson v Harman (1884) 1 Ex 850
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332
Wallis Nominees (Computing) Pty Ltd v Pickett [2012] VSC 82
COUNSEL:
P Travis for the plaintiff
JP Hastie for the defendants
SOLICITORS:
Aden Lawyers for the plaintiff
O’Donnell Legal for the second defendant
The plaintiff, Commsupport Pty Ltd, has for many years operated an information technology services business under the name Communications and Computer Support (CCS). In the course of that business it employed Nathan Mulligan and Kurt Mirow as computer technicians. In the latter part of 2012 Mr Mulligan and Mr Mirow established their own information technology services business through the incorporated entity, Identity Computing Pty Ltd (Identity Computing). Each resigned from their employment with CCS.
The contracts of employment of both Mr Mulligan and Mr Mirow contained covenants restraining each of them, for a period of three months, from acting for some of CCS’s customers or former clients and from contacting those customers with a view to enticing the customer to use their professional services or those of a third party.
The second defendant, Mr Mirow, acted in ways that potentially breached each of those covenants. Commsupport seeks damages from him for breach of contract. The essential issues to be resolved in the proceeding are:
1. The proper construction of the covenants;
2. The validity and enforceability of the covenants upon their proper construction;
3. The nature and extent of any breaches of the covenants;
4. What, if any, damages CCS is entitled to as a consequence of such breach.
In order to determine each of those issues it is necessary first to consider the business of CCS and Mr Mirow’s employment within it.
The business of CCS
In April 1997 Mr Russell Fell started the business of CCS with his wife.[1] From 2003 they arranged for it to be operated by Commsupport Pty Ltd as trustee for the CCS trust.
[1]T1-35.41.
Mr Fell described the nature of the services provided by CCS as sales and service of computer systems and servers as well as telephone systems. He said that CCS provided “the whole range of IT services for our clients”[2] which also included setting up internet networks. The clients of CCS are primarily located within a 100 kilometre radius of Toowoomba with 80 per cent of them being located within the city of Toowoomba, although Mr Fell gave evidence of having “clients all over Australia”.[3]
[2]T1-35.46.
[3]T1-35.40.
The business generally operates with a core of three technicians with Mr Fell as a consultant technician. Mr Fell’s wife performs administration assisted by a part-time employee.
Mr Fell described existing customers as being critical to the business. Existing customers, particularly those of long-standing, are a significant referral source for the business, as well as providing an ongoing revenue stream. Based on a “quick look in the yellow pages” he thought that there were about 40 competitors in the industry in Toowoomba.
When asked to describe the difficulties confronted in acquiring new customers without a referral, he identified the time taken to build rapport with the main decision maker and in getting to know their business model and what they are trying to achieve, and whether CCS is able to provide the services they are seeking. A barrier to approaching new customers is their existing relationship with another IT service provider. He said “you get shown the door pretty quick”.[4] He also identified that new entrants to the market did not necessarily have the advantage of established relationships from which referrals could be derived.
[4]T1-37.15.
Mr Fell described the process by which CCS would seek to convert a potential new customer to a long-term client as being one of considerable consultation. He said “I always liked to get them into the office to show them that we’ve got a stable office. That we’re – you know, there’s technicians there and all the rest of it so we’re more than capable of doing it. A lot of whiteboard sessions to work out what they want and, you know, map out where they want to go, what their pain points are at the moment, what they’re suffering, where the problems are, yeah, see where they want to move to”.[5] Getting to know, or identify, those people within the customer who have “a bit of technical nous” “can have a huge impact”, as they are able to identify the issues which CCS is then able to work on to solve the problem. Mr Fell suggested that it may take six to twelve months to get full knowledge of the customer which would also include technical matters such as ascertaining software licences, passwords, usernames, domain names and whether hardware is under warranty. Information concerning the customer is stored on CCS’s client relational management (CRM) package. Senior technicians have full access to that package.
[5]T1-37.33-42.
Mr Fell identified “quality of service” as the thing which CCS does to ensure that customers remain happy. That includes time of rectifying faults which are identified through CCS’s monitoring systems and which are able to be remotely fixed.
When asked to identify measures taken to remind customers that it was CCS with whom they were dealing rather than a particular technician, he nominated its branding. As examples, he referred to: all emails going to a CCS account; staff uniform; CCS branded business cards; website; vehicle signage; and stickers on customer computers with CCS contact details. He said “people are under no illusion that they’re dealing with CCS”.[6]
[6]T1-40.4.
He described the technicians as being involved in the provision of technical support to clients[7] and being “in the face of the customers”[8] all the time, but did so in contradistinction to the technicians being the face of the business.[9] He did not consider that they were the face of the business.
[7]T1-40.13.
[8]T1-42.22.
[9]T1-55.24.
Mr Fell’s evidence in this regard was consistent with evidence given by some of CCS’s clients. For example, Mr Mason who operated Party Hut agreed that Mr Fell was his primary point of contact and that his loyalty was to Mr Fell and not to Mr Mirow or Mr Mulligan.[10] Similarly, Mr Purcell, a director of the accountancy firm Moore Lewis and Partners, agreed that his business relationship with CCS was primarily based on a relationship with Mr Fell.[11] Similarly, Mr Reedy, a director of K&R Plumbing Supplies, agreed that he did not have a personal relationship with either Mr Mirow or Mr Mulligan.[12]
[10]T1-24.6-13.
[11]T1-28.1-6.
[12]T1-33.28.
Mr Fell described the business of CCS as having two distinct parts.[13] There is the computer or IT part, and the telephone part. The telephone part, he said, “goes back to my – my knowledge basis that I’ve got communication skills or telephone skills”.[14] In June 2012 Mr Mulligan and Mr Mirow had expressed interest in purchasing the computer part of the business and Mr Fell would have continued to operate the telephone part.
[13]T1-43.5.
[14]T1-43.6.
Mr Fell accepted the proposition that he was primarily responsible for managing the ongoing relationships with clients saying “I had the overall consulting final say because it was my company. I had to – yes – make sure we were going in the right direction”.[15] As owner, he felt responsible for managing the clients’ expectations.[16] He did, however, “rely on input from my technicians”.[17] Proposals to clients had to come through him and he would authorise what was being done.[18] Mr Mirow was not permitted to make proposals to clients without that having occurred. Mr Mirow’s evidence was that he had not introduced any new clients.[19]
[15]T1-55.25-29.
[16]T1-55.32.
[17]T1-55.39.
[18]T1-55.44-46.
[19]T3-45.5.
In respect of the allocation of work to particular technicians, Mr fell said that where the technicians’ skills fitted the clients’ needs, those technicians did those jobs, but added that more than one person could do a job on a site and that there was always a way of covering if a technician was doing a job.[20] He rejected the suggestion that, generally speaking, a particular client had a particular technician allocated to them,[21] saying that there were “no allocations of a technician to a client. None”.[22] Certain technicians got to know clients’ systems better than others, but if a client needed a technician the available technician went to the job.[23] Mr fell rejected suggestions that the work of several identified clients would be allocated to a particular technician, be that Mr Mulligan or Mr Mirow.
[20]T1-56.14-16.
[21]T1-56.18-19.
[22]T1-56.21-22.
[23]T1-56.25-31.
Mr Fell said that all technicians had relations with all of the CCS clients.[24] However, he also said that the computer technicians did not do any of the phone work. That work was performed either by himself or one of the phone technicians who he had over the years.[25]
[24]T1-56.38.
[25]T1-56.26-28.
Mr Mirow’s employment with CCS
It is admitted on the pleadings that starting on or around 5 February 2007 Mr Mirow was employed by CCS as a senior computer technician.[26]
[26]Second amended statement of claim (SoC) paragraph 4 and amended defence of the first and second defendants (Defence) paragraph 1.
It is further admitted[27] that as a senior computer technician Mr Mirow was responsible for:
[27]SoC paragraph and Defence paragraph 1.
(a) Providing technical services and support to the plaintiff’s customers;
(b) Researching problems and recommending solutions for the plaintiff’s customers;
(c) Identifying procedures to improve service support delivery for the plaintiff’s customers; and
(d) Handling the technical functions of all aspects of computer systems, networks and communications of the plaintiff’s customers.
Upon first being employed by CCS Mr Mirow entered into an employment contract dated 5 February 2007.[28] Although admitted on the pleadings that Mr Mirow was from that time employed as a senior computer technician, his position classification under that first contract was “Technician – Computing”.[29] The duties of that position were those listed in the job specification for a Technician – Computing and such other duties as may reasonably be allocated to him from time to time.[30] A job specification for the position of Technician – Computing was attached to the contract. It prescribed that the Technician – Computing was to be responsible for the day to day support of the operating systems and infrastructure that the clients of CCS use. He was to report directly to the operations manager. The operations manager was not identified in the job specification, or otherwise in the contract, although clause 3(a) of the contract prescribed that Mr Mirow was immediately responsible to Commsupport Pty Ltd and was to carry out such directions “given by the directors of the company namely Russell Sydney Fell”.
[28]Exhibit 1.
[29]Clause 2(a).
[30]Clause 2(c).
The job description prescribed five areas in which Mr Mirow was mainly, but not exclusively, to carry out his duties. It prescribed that the Technician – Computing may also supervise staff performing duties in those areas, and that he was to perform other duties as directed by management. The five prescribed areas were:
1. The provision of support to clients and other technical staff on various identified operating systems;
2. The provision of support to clients and other technical staff on various identified application systems;
3. The provision of support to clients and other technical staff on the networking structure that is required by the operating and application systems;
4. The completion of jobs according to priority; adhering to all CCS procedures and assisting the review of procedures with the aim of constantly improving customer service, assisting with the building of a knowledge base for technical staff to tap into by trapping information by way of “file notes”, “job cards” and project follow-ups; and
5. Assisting with stock control by participating in new product research and adapting products to clients’ needs.
Clause 14(a) of the contract included the following restrictive covenant:
“The employee expressly agrees as follows:
(a) Not at any time either during or after the determination of the employment for any reason and either on his own account or for any other person or for any firm or company to solicit, interfere with or endeavour to entice away from the employer any person, firm or company who at any time during the continuance of his employment shall have been a customer or client of the employer.”
The agreement was to take effect from 5 February 2007 and expire on 1 January 2008.[31] The parties agreed to commence bargaining for a new agreement 60 days prior to the expiration of that contract.[32] There is no evidence of any bargaining having taken place, or of any new contract having been entered into at the end of the contract term.
[31]Clause 1(a).
[32]Clause 1(b).
In February 2011 Mr Mirow entered into a further written employment contract with CCS.[33]
[33]On the pleadings (SoC paragraph 9(a); Defence paragraph 4) it is admitted that Mr Mirow’s contract was dated 21 February 2011 and that he entered into a further written contract with the plaintiff on or about that date. That date does not accord with the contract which is Exhibit 2. The document states on its face that it is dated 14 February 2011 and, where it is executed by the parties, says that it is dated 1 February 2011. It was tendered during the plaintiff’s opening, without objection, having been identified by counsel for the plaintiff, without explanation, as the contract “which was executed by Commsupport and Mr Mirow on 21 February 2011”, although the court admitted it as “the employment agreement of 14 February 2011”. No evidence was led which casts any light on why the contract would be admitted on the pleadings as having been entered into on 21 February 2011.
Again, although it is admitted on the pleadings that Mr Mirow was employed as a senior computer technician, recital A recites his having been offered employment “in the capacity of computer technician”. Clause 3.2 of the contract prescribes his duties and responsibilities are to act as a computer technician and as directed by the employer, or its director Mr Fell “as varied from time to time to allow the employer to respond to changes to its requirements”. Clause 3.2(a) provides that a job specification for the position of computer technician is “exhibited in annexure A” to the agreement. There is no annexure A. The intended job specification does not appear to have formed part of the written agreement. It cannot be said, therefore, whether the duties of computer technician under this contract were, or were intended to be, different from those specified in the job specification for Technician – Computing set out in the job specification for the position attached to the earlier contract.
As to any difference in Mr Mirow’s level of seniority viewed as at the time of his initial employment and as at the time of the 2011 contract being entered into, Mr Fell’s only evidence was that, at the earlier time, he would describe Mr Mirow’s experience as “probably about a level two technician”. This was in reference to a scale of one to six as provided under “the Award”. By the time the 2011 agreement was entered into Mr Fell said that Mr Mirow had “got to know all our clients. So – so there was – all the work that was – that had to be done he – he was – was there to do it, yep”. He said “we’d basically trained him up to that point. Yes”. He agreed with the suggestion of Mr Travis, who appeared as counsel for CCS, that Mr Mirow had become a more senior technician.[34]
[34]T1-41.29-45.
When asked “had he moved up in the scales?”, apparently intended as, and understood by Mr Fell to be, a reference to the Award pay scales, Mr Fell answered “probably, yeah. Well, they were – yeah at that point they were getting paid level 6 technician or better”.[35]
[35]T1-42.1-5.
None of that evidence assists in understanding how Mr Mirow may have become, or been considered, a more senior technician at the later time. The Award was not put into evidence, so there is no assistance to be drawn from what it might prescribe as skill levels, experience or other indicative qualities for payment at the various pay levels. There is also a more fundamental problem with Mr Fell’s evidence of pay scales under “the Award” and Mr Mirow’s progression through them from the earlier to the later time.
The 2011 employment contract defines “Award” to mean the Federal Modern Business Equipment Award 2010. It defines “Act” to mean the Fair Work Act 2009. Recital B to the contract recites that ‘the employees wage and conditions are governed by the Business Equipment Award 2010 and the Fair Work Act 2009”.
The award under which Mr Mirow was employed, or which set relevant pay scales ranging from 1-6 in 2007, could not have been the same award as that which governed his wage and conditions under the 2011 contract. It did not exist at the earlier time. The Act under which it was made had not yet been enacted.
Mr Fell’s evidence in this regard is meaningless and provides very little assistance in understanding how Mr Mirow’s seniority had progressed from the earlier time to the later time when the admitted fact is that he was employed as a senior computer technician from the outset of his employment.
As has already been mentioned, in 2012 there was a proposal that Mr Mirow and Mr Mulligan would acquire the computer part of CCS’s business and that Mr Fell would continue to operate the telephone part. This proposed acquisition did not eventuate.
On 9 August 2012 Mr Mirow tendered his resignation giving four weeks’ notice.[36] His last working day was to be 6 September 2012.
[36]Exhibit 3.
In early August 2012 Mr Mulligan also tendered his resignation to be effective from 29 August 2012.[37] At the time at which each gave notice of termination of their employment they were aware that Mr Fell was leaving on a holiday to France on 10 August 2012. He was to return on 27 August. Mr Fell considered it “pretty poor timing”.[38] He told them that he expected them to work while he was away.
[37]SOC paragraph 12, defence paragraph 4.
[38]T1-43.36.
The restraints and their proper construction
Each of Mr Mirow’s and Mr Mulligan’s 2011 employment contracts with CCS included the following Clause 13:
“13Restraint of trade
13.1For a period of three months from the date the employee’s employment with the employer concludes (for any reason), the employee may not directly or indirectly, in any capacity whatsoever:
(a)Act for any person or entity (natural or otherwise) that the employer had or has as a client during the six month period immediately prior to the employment with the employer concluding; or
(b)Contact or cause another to make contact with any person or entity (natural or otherwise) that the employer had as a client during the six month period immediately prior to the employees employment with the employer concluding, with a view to enticing that person or entity to use the professional services of the employee or a third party; or
(c)Solicit or assist any other person in soliciting any person who is or was an employee of the employer or to induce or attempt to induce any such employee to terminate its employment with the employer.
13.2Each covenant in this clause 13.1 is a separate covenant. If one or more of the covenants is held to be void or unenforceable the validity of the remaining covenants shall not be affected.
13.3 The parties acknowledge and agree that:
(a)The covenants set forward in this clause 13 are reasonable in scope and in all other respects; and
(b)The employer would not have entered into this agreement but for the covenants contained herein; and
(c)The covenants contained herein have been made in order to induce the employer to enter into this agreement.
If at any time of enforcement of clause 13, a court of competent jurisdiction shall determine that any such restriction is void or ineffective but would be valid and effective if some part thereof were deleted or the duration or area of application reduced such restriction shall apply with such modification as may be necessary to make it valid and effective.”
In Electricity Generation Corporation v Woodside Energy Ltd & Ors[39] French CJ, Hayne, Crennan and Kiefel JJ said the following in respect of the construction of commercial contracts:
“Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties ... intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience”.”
[39][2014] 251 CLR 640 at [35].
More recently, in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd,[40] French CJ, Nettle and Gordon JJ said:
“46The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
47In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
48Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
49However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
50Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.
51Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties ... intended to produce a commercial result". Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".
52These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales and Electricity Generation Corporation v Woodside Energy Ltd. (Citations omitted).”
[40][2015] 256 CLR 104 at [46]-[52].
In Clarke v Newland[41] Neill J drew the following rules of construction of agreements and restraint of trade from an analysis of earlier cases:[42]
“1.The question of construction should be approached in the first instance without regard to the question of legality or illegality;
2.… the clause should be construed with reference to the object sought to be obtained;
3.…in a restraint of trade case the object is the protection of one of the partners against rivalry in trade…;
4.…the clause should be construed in its context and in the light of the factual matrix of the time when the agreement was made.”
[41][1991] 1 ALL ER 397 at 402.
[42]In his seminal work on the subject, The Restraint of Trade Doctrine, Third Edition 2008 at 136-137, JD Heydon cites Neill LJ’s rules as “a modern statement of the rules of construction” adding further footnotes in support of the first and second rules.
Applying those rules, any ambiguity in the provision being construed which would, on the one hand result in a narrow and valid restraint, or on the other hand result in a wide and invalid restraint, should be resolved in preference for the former rather than the latter.[43]
[43]Heydon at 136 citing Mills v Dunham [1891] 1 CH 576 at 589-590.
In his written submissions, Mr Travis argued that:
“…the restraint is limited to soliciting for the provision of professional services of the kind offered by Commsupport, that is, professional IT services, and acting for customers in a capacity that competes in Commsupport’s provision of those services. It would be contrary to the approach in Mills v Dunham to suggest that the restraint was also aimed at preventing Mr Mirow, for example, from acting for, or soliciting Commsupport’s customers for professional accounting, legal or medical services, or as a “watch maker” or “umbrella maker”.”[44]
[44]The plaintiff’s closing submissions, paragraph 47.
Mr Travis submits that a construction which extended beyond that for which he contends would be “unnatural and unintended”.[45]
[45]Ibid, paragraph 48.
The submissions of Mr Hastie for Mr Mirow are to the contrary. He submits:
“…the restraint clause for courts to restrict the second defendant from acting for any person or entity who has been the customer of the plaintiff “in any capacity whatsoever”. It can, therefore, be readily seen that the clause is not limited to preventing the plaintiff (sic) from acting for a customer of the plaintiff in a capacity other than with respect to the provision of information technology services.”[46]
[46]Submissions of the second defendant, paragraph 44.
The submission for Mr Mirow more directly addresses the construction of the separate restraint contained in clause 13.1(a). The submissions for CCS address, in a combined way, both the separate restraints contained in subclauses 13.1(a) and (b). There is a danger in the latter approach. It risks conflating the two separate and distinct restraints such that one gives unwarranted and unintended meaning to the other.
The submissions for Mr Mirow also address, and seek to give meaning to, the word “whatsoever” as it is used in clause 13.1. The submissions for CCS do not address that part of the text of the provision.
In construing the meaning of each of the restraints, it is necessary to consider what the words “in any capacity whatsoever”, which appear in that part of clause 13.1 which applies generally to all of the restraints, qualify in each of the specific restraints contained in subclauses (a) and (b). In each case those general words qualify the action which introduces each subclause.
In subclause 13.1(a) that action is acting for any person or entity. It prohibits the former employer from acting for such a person or entity in any capacity whatsoever. It would, therefore, exclude the former employee from acting for the person or entity in the capacity of a contractor to them. It would also extend to excluding acting for such a person or entity in the capacity of an employee of them. So to it would extend to prohibiting acting for them in the capacity of their agent. Because the word “whatsoever” is used, each and every capacity in which the former employee may act for such a person is prohibited.
On its face, subclause 13.1(a) does not confine areas of activity in which the former employee is prohibited from acting (within any capacity) for the relevant person or entity. The prohibition against acting for the person in any capacity whatsoever, does not distinguish between various acts which the former employee may perform for the person in any capacity. The prohibition would include acting for the person in the provision of professional IT services to them, but it is not, in its terms, restricted to that activity. It differs from clause 13.1(b) in that regard. It does not permit the former employer to act for the person as their employee, provided the employment is not of a particular kind, or in a particular area of activity, or involve certain duties.
The restraint in subclause 13.1(b) is confined to an area of activity being the professional services of the former employee or a third party. Given the context and evident commercial objects of the agreement, restricting the professional services referred to in subclause 13.1(b) to professional IT services is the construction, of that restraint, to be preferred. The expression “professional services” as used in that restraint is ambiguous, and the circumstances of the making of the agreement would result in that ambiguity being resolved by construing that expression to mean professional IT services.
However, I do not consider that the expressed restriction on the restraint contained in subclause 13.1(b) should be read into the restraint contained in subclause 13.1(a). The prohibition in subclause 13.1(a) is not ambiguous; it is absolute. Given the interest of CCS to be protected was its customer connection, it cannot be said that an absolute prohibition on acting for a former customer in any capacity whatsoever, such that it would, for example, restrain Mr Mirow from entering any employment of whatever kind during the restraint period, was unintended. Complete separation during the period may have been precisely what was intended.
Commencing employment with a client of CCS, even in a role entirely unrelated to IT and, initially at least, with no intention Mr Mirow should do any such work, may nonetheless, over time, result in Mr Mirow, because of his presence as an employee of that person or entity, performing IT work. It could not, in my view, be said that the avoidance of such a situation by prohibiting Mr Mirow from acting for the client in any capacity whatsoever “cannot be reasonably supposed to have been contemplated by the parties”.[47]
[47]Haynes v Doman [1899] 2 CH 13 at 24-7.
Just as the court is “not bound to look for improbable and extravagant contingencies to make it void”,[48] “full effect should be given to all the possibilities which fall within the terms in which the parties have expressed their agreement” even if such an event which would fall within its terms is an “unlikely possibility”.[49]
[48]Rannie v Irvine [1844] 7 MAN & G 969 at 976.
[49]Geraghty v Minter (1979) 142 CLR 177 at 180.
In subclause 13.1(b), the expression “in any capacity whatsoever” qualifies the activity of contacting or causing another to make contact with CCS’s clients with a view to enticing them to use the professional services[50] of the former employee or any third party. What is prohibited is contact with the relevant intent, no matter in what capacity that contact is made or caused to be made by another person. Whether the contact be in the former employee’s own personal capacity as a potential employee whose professional IT services might be used in house, or as a contractor providing such services on his own account, or as a director of some corporate entity, or as an employee or agent of some third party offering IT services, it is prohibited.
[50]Limited to professional IT services as already explained.
The construction of the restraints is otherwise straight forward. The period of restraint in respect of each is three months commencing from the date of termination. The prohibition against acting for clients in the case of subclause 13.1(a) and the contacting or causing to be contacted former clients in the case of subclause 13.1(b), extends to such activity engaged in either directly or indirectly. As such it would extend to Mr Mirow causing Mr Mulligan to make contact with such persons or entities. The contact prohibited under subclause 13.1(b) is only that engaged in with a view to enticing the person or entity to use the professional IT services of the former employee or a third party. As such it would extend to Mr Mirow contacting, or causing Mr Mulligan to contact, such persons with a view to enticing them to use the professional IT services of Identity Computing.
Under each restraint the relevant persons or entities which Mr Mirow is prohibited from acting for or contacting are those who CCS have had as a client in the six months immediately prior to the cessation of his employment.
Are the restraints valid?
The legal principles to be applied by the courts in considering whether to uphold covenants in restraint of trade are of long-standing. Lord MacNaghten’s statement of the underlying principles in Nordenfelt v Maxim NordenfeltGuns and Ammunition Co Limited[51] in 1894 remains as current today as it was then. Lord MacNaghten said:
“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, 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.”
[51][1894] AC 535 at 565.
So too the explanation provided in 1916 by Lord Parker of Waddington in his speech in the House of Lords in Herbert Morris Limited v Saxelby[52] of the test of reasonableness in the interests of the contracting parties, as referred to by Lord MacNaghten, continues to be cited as a touchstone when considering the issue. Lord Parker put it this way:
“With regard to the former test, I think it must afford no more than adequate protection to the party in whose favour it is imposed.”[53]
[52][1916] 1 AC 688 at 707.
[53]For restatements of these principles in the High Court of Australia see Lindner v Murdoch’s Garage (1950) 83 CLR 628 at 653; Buckley v Tutty (1972) 125 CLR 353 at 379; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 315-316.
In order for there to be a valid restraint of trade it must be directed toward some legitimate interest of the employer recognised as being capable of being the subject of protection, rather than toward protection against mere competition.[54] Each of trade secrets and confidential information and loss of customer connection are interests which an employer may legitimately protect by means of a covenant in restraint. Customer connection has long been accepted as an interest of the employer legitimately the subject of a covenant in restraint obtained from an employee.[55] The issue which arises in any particular case is whether the particular employee, by virtue of his or her employment with the employer, has had contact with the customers such that the relationship between the employee and the customers is one whereby the employee holds some influence over the customer.[56]
[54]Lindner v Murdoch’s Garage (1950) 83 CLR 628 at 634; Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 at 301; Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449 at [28].
[55]For example, see Lindner v Murdoch’s Garage. (1950) 83 CLR 628 at 654.
[56]Herbert Morris Limited v Saxelby at 702; Dews v Fitch [1920] 2 CH 159 at 181; Lindner v Murdoch’s Garage at 654.
The matter was put somewhat colourfully by Hoover J in Arthur Murray Dance Studios of Cleveland Inc. v Witter[57] when he said:
“… the employee, by contact with the customer, gets the customer so strongly attached to him that when the employee quits and joins a rival he automatically carries the customer with him in his pocket.”
[57]105 NE 2d 685 at 705 (Ohio) CP, 1952.
And later His Honour said:
“The personal relationship between the employee and the customer [is] such as to enable the employee to control the employer’s business.”[58]
[58]Ibid at 706.
The requisite relationship has otherwise been described as one whereby the employee has become the “human face” of the employer’s business,[59] or that the employee was the “persona” of the employer.[60]
[59]Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717 at [25]; Brinks v Cain [2007] NSWSC 62 at [5].
[60]Burton & Eising v Wright Trading Pty Ltd [2007] QSC 17.
Such a relationship will be much more readily recognised in circumstances in which the role of the employee concerned involved the development of the employer’s business and extending the customer base. Where that is so, Brereton J in Koops Martin Financial Services Pty Ltd v Reeves said:
“A more robust view is taken where the employee’s role includes obtaining and extending custom for the employer’s business. Where an employee’s duty includes to build up the employer’s clientele as well as to deal with existing clients, a wide restraint is more likely to be upheld, because in such circumstances the employer is entitled to protection against the employee taking advantage of the period of service to prepare for later competition [GW Plowman & Sons Ltd v Ash [1964] 1 WLR 568; [1964] 2 All ER 10; Normalec Ltd v Britton [1983] 9 FSR 318 at 324; Dean, The Law of Trade Secrets, 2nd Ed [11.150]. In such a case, the establishment of a customer connection is not merely incidental to the employment, but its purpose. In that context, a covenant is considered reasonable, first, to remove the temptation that by cultivation of the target market during employment, the employee may prepare the ground for its exploitation by himself after the employment ends, rather than for his employer during the employment; and, secondly, to prevent exploitation after termination of the employment by the employee of a connection with the customer which the employer has paid the employee to establish for the employer’s benefit … .”[61]
[61][2006] NSWSC 449 at [44].
Similarly, in HRX Holdings Pty Ltd v Pearson,[62] Buchanan J in upholding a two year restraint against a former employee who had been integral to the development of his former employer’s business, described the employee thus:
“Mr Pearson is regarded as having a very special ability to connect with prospective clients, gain their trust and convince them of the benefits of the techniques and strategies which he has (with HRX in more recent years) developed. Mr Pearson shares the view that he has a particular ability to engage with prospective (and current) clients and gain their trust. It is meant that he has been a key component of HRX’s success to date in first entering, and then growing in, a small and competitive market in Australia. Various witnesses refer to Mr Pearson ‘sprinkling fairy dust’ and Mr Pearson in his evidence did not seem uncomfortable with characterisations of this sort. Although the operations of HRX have grown substantially since the time since that Mr Pearson executed the executive service agreement it was always contemplated that the business would initially be built around him and that he would continue to play a pivotal role in business development.”
[62][2012] FCA 161.
By way of contrast, in Wallis Nominees (Computing) Pty Ltd v Pickett,[63] Sifris J in the Victorian Supreme Court, in refusing to restrain an IT specialist from moving into an in-house management position with a former client of the business for whom the employee had performed work, said:
“Pickett’s role did and was not intended to include obtaining or extending the client base of DWS. He was in an altogether different position to that of Mr Peters in Cactus Imaging or Mr Reeves in Koops Martin.
In this case, DWS did not, at the time the agreement was entered into (or indeed at any stage), propose to develop goodwill around Pickett or other individual consultants or the services they were to and did provide. Rather, the evidence establishes that DWS at all times promoted and directed its marketing and advertising skills to the enhancement of the goodwill of the DWS name and presence. Where DWS was to provide individual consultants to clients as was contemplated in the case of Pickett and others, it did so with the intention of enhancing its presence and share of work from that client, rather than making or promoting Pickett or other individual consultants as the ‘human face’ of its business.”
[63][2012] VSC 82 at [63]-[64].
In my view, Mr Mirow’s role in CCS aligns much more closely with that considered in Wallis Nominees than in HRX Holdings.
McMurdo J in the Queensland Supreme Court in AGA Australia Pty Ltd v Tokody said of the test of whether there is a customer connection of the requisite degree:
“The relevant interests to be protected in this respect is the value of the relationships which the defendant had developed with clients and which were acquired in the course of her employment. Such relationships are beneficial to the employer, and the benefit is treated as an interest which justifies some reasonable protection upon the cessation of the employment. A restraint upon competition is not justified simply from a history of contact between the employee and customers. There must be a relationship of a kind which could make it a contributing factor in a customer’s decision to give its business to a competitor for whom the former employee now works.”[64]
[64][2012] QSC 176 at [17].
A point upon which restraints often fail in respect of the customer connection interest, is not that the employee sought to be restrained had no such relationship of influence over customers of the employer, but rather the restraint has been drawn so broadly that it applies not only in respect of those customers with whom there was such a relationship, but also to those whom there was no such relationship. It is at this point that the legitimacy of the interest gives way to the restraint being seen as one merely against competition.[65] The employee could be considered to have no more influence over such customers than a stranger.[66]
[65]Harlow Property Consultants Pty Ltd v Byford [2005] NSWSC 658 at [30].
[66]Burton & Eising v Wright Trading Pty Ltd [2007] QSC 17 at [47].
The relevant bargaining position of the parties is also relevant to the consideration of whether the restraint is reasonable in the interests of the parties.[67]
[67]Amoco Australia Pty Ltd v Rocco Bros Motor Engineering Co Pty Ltd, supra at 136-137; A Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616 at 623; AGA Assistance Australia Pty Ltd v Tokody, supra at [33]; Artcraft v Chandler [2003] QSC 102 at [33].
Applying these principles to this case leads me to the conclusion that the restraints imposed by each of subclauses 13.1(a) and (b) are not reasonable and extend beyond what might be adequate to protect the legitimate interests of CCS.
To explain my reasons for that conclusion, it is convenient to commence with the last of the principles referred to above: the bargaining positions of the parties.
At the time at which the contract was entered into in February 2011, Mr Mirow had been working for CCS for just on four years. The contract which governed his employment for the first 11 months contained provisions in restraint of trade. That contract ended on 1 January 2008. Despite Mr Fell’s evidence that he had restraints with his technicians “right from when I first hired my first worker in 1998”,[68] it is clear on the evidence that Mr Mirow’s employment contract did not contain any provisions in restraint of trade from 1 January 2008 until this agreement was entered into in February 2011.[69] The employment relationship is contractual in origin.[70] Although the employment relationship continued after the expiration of the 2007 contract, it did so under a different contract.[71] It is not necessary to determine what the terms of that contract were. It suffices to observe that they did not include restraint provisions amongst them.
[68]T1-41.4-5.
[69]Throughout that period the employment relationship between the parties continued.
[70]Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 420.
[71]Quinn v Jack Chia (Australia) Ltd [1992] 1 VR 567 at 573.
The 2011 contract was drafted by Mr Fell with the help of his solicitor. Mr Fell presented Mr Mirow with the 2011 contract the day before it was to be signed. Mr Fell made it very clear to Mr Mirow that he would not agree to any changes to its terms whatsoever. The following day, prior to signing the contract, Mr Mirow raised a number of concerns about the contract with Mr Fell. Those concerns included the restraint of trade.[72] Mr Mirow was told by Mr Fell that the contracts were not going to be changed. Had Mr Mirow not signed the contract, unaltered, his employment with CCS would not have continued.[73]
[72]T3-40.46.
[73]Mr Fell’s evidence T1-50.25 to 1-51.3 and T1-54.20 to T1-55.4.
Mr Mirow had asked Mr Fell if there was to be any additional remuneration. Mr Fell said there would not be; Mr Mirow was to remain on his then current remuneration.[74]
[74]T3-41.1-5.
Mr Hastie, counsel for Mr Mirow, submits that this evidence clearly establishes that the parties were far from being in a position of equal footing in relation to entering into this contract. He submits that CCS “held all the cards” and that Mr Mirow was presented with the contract on a “take it or leave it” basis.[75] He submits that Mr Mirow was bargaining from a very weak position, essentially having to sign the agreement notwithstanding his concerns if he was to preserve his employment of four years. There was no negotiation over the terms of the contract.[76]
[75]Submissions of the second defendant, paragraphs 14 and 16.
[76]Ibid at paragraph 18.
On a related issue, Mr Hastie also contends that the restraint clause was not supported by sufficient consideration, Mr Mirow obtaining no advantage whatsoever from signing the agreement.
Mr Travis, in his oral submissions, submitted that Mr Hastie had misunderstood the authorities upon which he based his submissions on this point.[77] Mr Travis submitted that all that those authorities stood for was “the proposition that if the parties were to seek to rely upon the suggestion that because they’re both grown-ups, because they have gone and entered into an agreement and assented to certain terms, that they are therefore – that should satisfy the reasonableness requirement.[78]”
[77]T5-26.45.
[78]T5-26.46 to T5-27.5 and T5-27.28-30.
Mr Travis submitted that it was for that reason the plaintiff did not seek to rely upon clause 13.3(c) of the agreement which is such a clause by which the parties agree to the reasonableness of the restraint. Mr Travis sought to make good this point by reference to “an authority coming out of the UK”, referred to in Mr Hastie’s written submissions. This would seem to be Mr Hastie’s reference to A Schroeder MusicPublishing Co Ltd v MacAulay[79] in support of his contention that inequality in bargaining position is relevant to the reasonableness of the restraint. Mr Travis submitted that it established only that in situations in which employers may be imposing restraints on employees “the courts have to be vigilant about whether these clauses are, in fact, reasonable as between the parties”.[80]
[79][1974] 3 All ER 616.
[80]T5-27.25-30.
In my respectful opinion, the submissions of Mr Travis misunderstand the authorities. It is true that in Schroeder Lord Diplock did state:[81]
“The fact that the appellant’s bargaining power vis a vis the respondent was strong enough to enable them to adopt this take it or leave it attitude raises no presumption that they used it to drive an unconscionable bargain with him, but in the field of restraint of trade it calls for vigilance on the part of the court to see that they did not.”
[81]At 624.
However, his Lordship had observed of a party who was able to offer goods and services on a “take it or leave it” basis:
“To be in a position to adopt this attitude towards a party desirous of entering into a contract to obtain goods or services provides a classic instance of superior bargaining power.”
This observation had been made in his Lordship’s analysis of contracts, as was the contract under consideration, which were in standard forms. He considered there to be two forms of standard contracts, “the first of very ancient origin are those which set out the terms on which mercantile transactions of common occurrence are to be carried out”. Of those his Lordship observed:
“If fairness or reasonableness were relevant to their enforceability the fact that they are widely used by parties whose bargaining power is fairly matched would raise a strong presumption that their terms are fair and reasonable.”
Part of the court’s vigilance as referred to by Lord Diplock involves, in assessing the issue of reasonableness as between the parties, consideration of their respective bargaining strengths.
Mr Travis’ further submission that the authorities go no further than supporting the proposition that the parties own assent to the contract and agreement as to its reasonableness will not bind the court, also misunderstands the full extent of those authorities in my respectful view. For example, in Artcraft Pty Ltd v Chandler,[82] Muir J (as His Honour then was) said:
“In determining whether the restraint is reasonable in the interests of the parties, it is relevant that the parties have bargained at arm’s length on an equal footing. It would appear, however, from the judgment of Gleeson CJ, Gummow, Kirby and Hayne JJ in Peters Ltd (WA) Ltd v Petersville Ltd[83] that little weight is to be attached to the consensual nature of the restraint.”
[82][2003] QSC 102 at [23].
[83](2001) 205 CLR 126 at 142-143.
The issues of bargaining position referred to in the first sentence, and of consensus in the second sentence, although perhaps related in a particular case, are nonetheless distinct. So much is evident from His Honour’s citation of that part of the judgment in Peters Ltd (WA) Ltd v Petersville. In that part of the judgment the plurality considered the consensual nature of the restraint, but the issue of respective bargaining position did not feature in those considerations.
The fact that the 2011 contract was presented on what may fairly be described as a “take it or leave it” basis in the circumstances as set out above does not, of itself, render the restraint unreasonable: but it is a matter relevant to a consideration of whether it is unreasonable between the parties.
There can be no doubt that there was a vast disparity in the relative strengths of the parties’ bargaining positions. Without prior notice or negotiation Mr Mirow, as an employee, was presented with a non-negotiable contract which would not only govern the employment relationship which was then of four years standing into its future, but would also restrict the use which Mr Mirow could make of his skills and labour after the cessation of that relationship. If he did not agree his employment would end, and the security which such employment brings would be lost. On the evidence, Mr Mirow had no reason to fear that his employment was otherwise insecure. In fact, the requirement to enter into the new ongoing contract is evidence that his employment was otherwise secure.
On the related issue of consideration, Mr Travis submitted on behalf of CCS that what was being offered in return for the restraint was continued employment which was substantial consideration because it provided ongoing salary, ongoing access to clients and an ongoing ability to learn how the various systems operated while being paid. That is a complete answer to the contention that Mr Mirow obtained no advantage whatsoever in return for signing the 2011 agreement. Although no authority was cited in support of the submission, it exists.
In Electroboard Administration v O’Brien[84] the New South Wales Court of Appeal considered a case in which an existing employee was asked to sign a letter which would add a term in restraint of trade, including post-employment restraint, to her contract. For about a year she worked on without signing the letter, but under mounting pressure eventually capitulated and signed. The trial judge’s conclusion was that it was clear that she had signed because she was concerned that she might lose her employment. Of the contention that the new term was not supported by consideration, Meagher JA, with whom Mason P and Priestley JA agreed, said at [10]:
“They lost before Cohen J because his Honour held that the new term was not supported by any consideration. In my view the appellant’s are correct in submitting that his Honour fell into error. On his Honour’s own finding, the appellants said to Mrs O’Brien ‘we shall dismiss you if you don’t sign’, or alternatively ‘we shall not dismiss you if you do sign’, I cannot see how such an agreement lacks consideration: this is a benefit to the employers in obtaining the signature, and a benefit to the employee in diverting the prospect of imminent dismissal.”
[84][1999] NSWCA 452.
The element of the restraint in each of subclauses 13.1(a) and (b) which establishes their unreasonableness as between the parties is its extension to any person or entity which CCS had as a client during the six month period immediately prior to the conclusion of Mr Mirow’s employment. The inclusion of all clients goes beyond what is adequate to protect the legitimate interests of CCS being its confidential information and its customer connection established through Mr Mirow.
It may readily be concluded that Mr Mirow would have developed relationships with a number of clients of CCS through the work he performed for them on behalf of CCS. It also may readily be concluded that amongst those clients with whom he had developed such relationships would be included some or all of those in respect of whom he is alleged to have breached the covenants contained in either or both of subclauses 13.1(a) and (b). It may further readily be concluded that the nature of those relationships was such as to justify some reasonable protection of CCS on the cessation of Mr Mirow’s employment. However, it could not be concluded on the evidence that such relationships extended, or could reasonably have been expected at the time of which the parties entered into the contract to extend, to the clients captured by the covenants.
On the findings which I have made the appropriate method of calculation would have been that set out in scenario two at schedule two to the joint experts’ report applying the DFCS method and calculating the loss at six months. The loss would be calculated only on the group A clients with the inclusion in that group of Interstate Leasing and Finance.[169]
[169]Which appears in group B in the report at which the parties agree should be included in group A.
It is the application of that method of calculation which is consistent with the need to assess the likelihood or probability of future hypothetical events occurring. Having assessed the probability as being so high as to be almost certain 6 months after the cessation of employment, that is the appropriate point at which to determine damages caused by the breaches.
Two further issues need to be addressed. Those are the two areas of disagreement between the experts as to the inclusion of irregular income and the appropriate treatment of costs of sales. In the circumstances, these issues can be addressed briefly.
In respect of the former, I accept Mr Haines approach. Particularly given the relatively short period over which any losses suffered by CCS would have been caused by breaches of the covenants; the inclusion of irregular income, which occurs in infrequent and abnormal levels, would be inappropriate. Furthermore, there was evidence of clients’ changing needs given advances in and changes to technology, the movement from clients maintaining their own service to cloud based solutions being the most notable. Those circumstances further demonstrate the inappropriateness of including irregular income, and particularly on a historical basis.
In relation to costs of sales, I accept the approach of Ms Wilson. I agree with her that Mr Haines giving a greater weighting to results over the past two years is inconsistent with his exclusion of irregular income: which is the approach I accept.
Costs
The appropriate order would appear to be that the plaintiff pay the defendant’s costs of an incidental to the proceeding, including reserved costs, on the standard basis.
The parties may make submissions in writing within 14 days as to why this is not the appropriate order, should they wish to do so.
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