EagleBurgmann Australia Pty Ltd v Ross Grant Leabeater
[2012] NSWSC 573
•30 May 2012
Supreme Court
New South Wales
Medium Neutral Citation: EagleBurgmann Australia Pty Ltd v Ross Grant Leabeater & Anor [2012] NSWSC 573 Hearing dates: 29.03.12, 30.03.12, 02.04.12 Decision date: 30 May 2012 Before: Nicholas J Decision: Par 127
Catchwords: EQUITY - fiduciary duty - whether employee and employer in fiduciary relationship - breach - account of profits - whether relevant that employer unable to make profits for which account is taken - just allowance - whether defendants discharged onus of proving allowance claimed
CONTRACT - employment contract - restraint of trade clause - whether reasonable - clause preventing employee's involvement in business "which carries on the operations or business similar to" and "which is in competition with" employer - clause applied "in respect of" every State and Territory of Australia and New Zealand - whether employee involved in competition with employer - whether restraint for one year after termination of employment reasonableLegislation Cited: Corporations Act 2001 (Cth) Cases Cited: Breen v Williams [1996] HCA 57; (1995-1996) 186 CLR 71
Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; (2007) 71 NSWLR 9
Colour Control Centre v Ty (1996) 39 AILR 5-058
Franklins Pty Ltd v Metcash Trading Pty Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603
Furs Ltd v Tomkies & Ors [1936] HCA 3; (1935-1936) 54 CLR 583
Jones v Dunkel [1959] HCA 8; (1958-1959) 101 CLR 298
Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41
Jardin v Metcash Ltd [2011] NSWCA 409; (2011) 285 ALR 677
Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 717
R v Byrnes [1995] HCA 1; (1995) 183 CLR 501
Spotless Group Ltd v Blanco Catering Pty Ltd [2011] FCA 979; (2011) 93 IPR 235
Streeter & Ors v Western Areas Exploration Pty Ltd [2011] WASCA 17; (2011) 278 ALR 291
Warman International Ltd & Ors v Dwyer & Ors [1995] HCA 18; (1994-1995) 182 CLR 544Texts Cited: Meagher, Gummow and Lehane, Equity: Doctrines and Remedies; 4th Ed Category: Principal judgment Parties: EagleBurgmann Australia Pty Ltd - plaintiff
Ross Grant Leabeater - first defendant
Silverfox Enterprises Pty Ltd - second defendantRepresentation: Counsel:
J J E Fernon/C Bannan - plaintiff
F G Kalyk - defendants
Solicitors:
Horton Rhodes - plaintiff
Robert Tricca & Associates - defendants
File Number(s): 11/358235
Judgment
By its amended summons filed 15 March 2012 the plaintiff (EBAU) sues the first defendant (Mr Leabeater), a former employee, for breaches of his employment contract, and of fiduciary duties, and for contravention of s 182(1) Corporations Act 2001 (Cth) (the Act). The plaintiff also sues the second defendant (Silverfox) for its knowing involvement in Mr Leabeater's wrongful conduct.
EBAU supplies and distributes industrial equipment including expansion joints and mechanical seals in Australia and, until recently, in New Caledonia. Mr Wolfgang Kindinger is its managing director. EBAU and EagleBurgmann New Zealand Ltd (EBNZ) are wholly owned subsidiaries of EBI Asia Pacific Pte Ltd (EBI) which is based in Singapore.
Mr Leabeater has been the sole director and shareholder of Silverfox since about 19 April 2002. He is its alter ego. He was employed by EBAU from about 12 February 1996 to 29 August 2011 as the product manager for expansion joints. He reported directly to Mr Kindinger.
An expansion joint is a product designed to absorb the expansion, contraction and/or vibration in pipes, pipelines, and ducts caused by, for example, changes in temperature or movement in the ground. A mechanical seal is a product used in rotating equipment such as pumps, mixes and compressors to stop it from leaking.
Between about 2006 and early 2011 EBAU supplied expansion joints to Vale Nouvelle Caledonie SAS (Vale) for use in the Goro nickel mine which it operated in New Caledonia. Mr Leabeater was EBAU's employee responsible for this supply. In early 2011, EBAU determined to cease supplying expansion joints and other products to Vale, and Mr Kindinger informed Mr Leabeater accordingly. He also instructed Mr Leabeater to refer any enquiries or orders from Vale to EBNZ.
On 17 February 2011 Mr Leabeater put to Vale a proposal for the supply of expansion joints to Vale by Silverfox. Thereafter, until about November 2011, Silverfox sold expansion joints and other products to Vale. In late August 2011 EBAU discovered the involvement of Mr Leabeater and Silverfox in the transactions. When confronted about this by Mr Kindinger on 29 August 2011, Mr Leabeater resigned his employment with immediate effect.
The principle issues in these proceedings are EBAU's claim for an account of profits from Mr Leabeater for breach of fiduciary duty as an employee, and its claim for orders for enforcement of the restraint provisions of the employment contract.
Background
On 1 February 1996 EBAU (then Burgmann Seals Australia Pty Ltd) entered into a contract with Mr Leabeater under which he was employed as product manager expansion joints with responsibility for sales into such territories as might be designated from time to time. Relevantly, the contract included the following provisions:
"1. EMPLOYMENT
The Company shall employ the Employee and the Employee shall serve the Company initially as Prod.Mng.Exp.Joint with responsibility for sales into such sales territory as may be designated by the Company from time to time (hereinafter called "the designated sales territory") and subject to such orders and directions as may be given from time to time to the Employee by the Company and to carry out such other duties as the Company may from time to time in its absolute discretion determine.
...
7. DUTIES
The Employee shall:
7.1 devote the whole of his time, attention and ability to the business of the Company and personally attend thereto at all necessary times which may be required for the proper performance of his duties under this Agreement;
7.2 at all times exercise the utmost good faith in his dealings with the Company and shall not place himself or allow himself to be placed in a position where his own interests are in conflict with those of the Company;
7.3 perform all normal duties consistent with his employment and shall in regard thereto, comply with such instructions as may from time to time be given to him by his supervisors or the Board of Directors;
...
7.6 be responsible for the production and achievement of such sales targets (quotas) that the Company shall reasonably set for the designated sales territory of the Employee.
...
9. RESTRAINT AGAINST COMPETITION AND DISCLOSURE
9.1 The Employee shall not, during the period of this Agreement, directly or indirectly carry on, be employed, interested or associated with or engaged in or in any way interest or concern himself in any business which carries on the operations or business similar to that of the Company which is in competition with the Company or finance or guarantee the obligations of any such business.
9.2 The restraint shall operate for the full period that the Employee is employed by the Company plus a further period of one (1) year from the date of the termination of his employment with the Company (for whatsoever reason) in respect of every State and Territory of Australia and the country of New Zealand.
9.3 This restraint, insofar as it relates to any business or activity set forth in subclause 9.1 above, an any province or territory set forth in subclause 9.2 above is separate, distinct and severable from any other business or activity, or province or territory so stipulated and the invalidity of this restraint in respect of any business or activity, or province or territory shall not effect its validity in respect of any other business or activity or province or territory. The Employee hereby grants to the Company the right to release him from the whole or part of this restraint as the Company may, in its sole discretion, deem fit."
The evidence about Mr Leabeater's duties was uncontroversial. During his employment as a salesman, he developed expertise in, and specialist knowledge of, the range of expansion joints for supply and application in different situations. He became EBAU's senior employee in relation to them. He worked from EBAU's offices in Sydney, and travelled from time to time to meet customers and potential customers. As production manager for expansion joints, Mr Leabeater's duties included developing and maintaining contacts with existing and potential customers, which included large construction and engineering companies, and identifying and executing new projects. As EBAU's representative in a highly competitive industry, over time Mr Leabeater established contacts and relationships with customers which involved a thorough understanding and knowledge of their business and technical requirements, and product usage. According to Mr Kindinger he was a "one-man band" for EBAU's expansion joint business. The significance of Mr Leabeater's role was described by Mr Kindinger (aff 23.03.12) thus:
"6 ... the relationship a sales person has with a customer is also a significant factor in the customer's decision. The ability of a supply company to understand the customer's needs, meet the customer's technical requirements and ensure ongoing support and service (for example, in the supply of any spare parts, replacement parts or repairs) is critical to securing new and ongoing business. The sales person's role is to sell this ability of the supply company to the customer and the relationship between the sales person and the customer is an important part of this process. In my experience, a customer will often prefer one supplier over another because of their relationship with that supplier and/or give a supplier the first opportunity to quote because of their relationship."
Mr Leabeater said (aff 15.03.12, par 30) that he generally exceeded his budgets over the 15 years he worked for EBAU, averaging sales of about $1.8 million per year. He said:
"31. My sales budget versus actual sales whilst employed at EagleBurgmann between 2007 and August 2011 was as follows: 2007 - budget: $1,4000,000; actual: $2,6000,000; 2008 - budget: $1,480,000; actual: $2,900,000; 2009 - budget: $1,600,000; actual: $4,900,000; 2010 - budget: $1,800,000; actual: $2,100,000; 2011 - budget: $1,800,000; actual: $900,000."
In about August 2005 Mr Leabeater became responsible for developing the business of supplying expansion joints to Vale for the Goro mine project, resulting in sales from about March 2007 onwards. By about June 2008 EBAU had supplied to the project mechanical seals to a value of about $700,000, and expansion joints to a value of about $1.5 million.
In about May 2007 Mr Leabeater obtained for Silverfox an agency from Landia A.S. (Landia), an entity which operated from Denmark, to market its products in Australia such as submersible mixers and pumps, none of which were distributed by EBAU.
In about June 2008 EBI decided that supplies of all products, including expansion joints, to customers in New Caledonia, including Vale, should be undertaken by EBNZ. Mr Leabeater was so informed on 18 June 2008. The decision came as a disappointment to Mr Kindinger and Mr Leabeater, and email correspondence thereafter shows EBAU's attempts to persuade EBI to allow it to continue to supply expansion joints to New Caledonia. Correspondence included an email of 17 December 2009 from Mr Kindinger to EBI which referred to Mr Leabeater's work as follows:
"On the expansion joint side however we put an enormous amount of work into this account over the last few years (8 years to be correct!) and established a very good working relation ship [sic] with the Goro people responsible for EJs! Earlier this year our EJ Product Manager went on site together with a KEB service engineer to sort out some technical problems, which again resulted in more sales for us!
EBAU's understanding and appreciation of Goro's management objectives, administration procedures, maintenance structure, process operations and environment is invaluable and immeasurable! We know their business like the back of our hand, we know the history of all expansion joints in operation, we understand their business and they know EBAU!"
The email of 18 December 2009 from EBI to Mr Kindinger included information that EBNZ was to cover the supply of all products, including expansion joints, to New Caledonia. It was explained that EBI considered "... that from the territorial and customer stand point it is best to have one-face facing the customers in a single market place". EBAU was instructed to accept the decision and to "move on". The email was forwarded to Mr Leabeater on 21 December 2009.
Until about February 2011 EBAU continued to meet Vale's orders for expansion joints on the basis that they related to the initial project.
On 13 February 2011 Mr Paul Preston of Vale sent to Mr Leabeater a request for a quotation for spares for the Goro project.
At about this time, according to his unchallenged evidence, Mr Kindinger instructed Mr Leabeater to refer all enquires from Vale to EBNZ. There was also a conversation to the following effect (aff 24.02.12, par 43):
"Mr Leabeater: I have a company on the side. Can't we just continue to deal with New Caledonia, but do it through my company instead?
Me: No, we can't do that. It's not an option. I don't like the decision much either, but we have to respect head office's decision."
On 17 February 2011 Mr Leabeater sent Mr Preston an email in the following terms:
"Further to our telephone conversation concerning the supply of expansions bellows. Please find as follows my proposal for Clinton Avery and Alex. If you have any comments then please feel free to voice them before sending on to Clinton & Alex, thank you Paul.
Dear Clinton & Alex,
The supply of Expansion Bellows - Project & Operations.
Since the beginning of the Vale Nickel Refinery project, I (Ross Leabeater/Project Manger Expansion Joints) have been involved with the supply of EXPANSION BELLOWS through EagleBurgmann Australia, an estimated value well over 7 million dollars, approximately 700 expansion joints. #### I have extensive knowledge and understanding of the events that have transpired with the supply of expansion bellows and the technical/design difficulties encountered.
The reason I have introduced you to my contribution and asset to this project is that EagleBurgmann Australia (EBAU) until now are still acquiring RFQ's and orders from project and operations, but as of today my manager as [sic] directed me not to service these RFQ's/Orders any longer, because the sales territory has been officially changed last year by EagleBurgmann Management, located in Singapore. Vale will now come under EagleBurgmann New Zealand (EBNZ) and my business opinion to this decision is that the interest of Vale has not been given any consideration. I would have like [sic] to express my thoughts to Management & EBNZ of this decision but until now I have never been consulted by anyone. I have many reasons for this stance, the main reason is familiarity with Vale's operations and expansion bellow requirements, I know EBNZ have limited knowledge and experience to offer and don't have the necessary skill, tools, information to perform adequately and additionally they will be going through an agent based in New Caledonia which will further complicate the service with unnecessary delays, misunderstandings and confusion.
I would like to put an alternative expansion bellows proposal to Vale - Project and Operations to consider. I am the director of a company called 'Silverfox Enterprises' ABN no. 29 100 264 471, this company has been operating for 4 years in sales and service of Chopper Pumps and Mixers as Australian Agent for 'Landia' of Denmark. To enable a smooth transition for expansion bellows without any interruptions to Vales [sic] operations, SilverFox can immediately manage your RFQs/Orders from project/operations without any changes occurring to the product type, quality, service, technical support, price and delivery. As stated in my introduction, the reason for the immediate smooth transition is that I (Ross Leabeater) will be looking after your expansion bellows business and I can absolutely 100% guarantee you I will deliver the same professional service and conduct or better than what you have been obtaining from EBAU/Ross Leabeater. In other words it's the person that you are doing business with which really determines the service outcome.
I would appreciate if you would keep this proposal confidential from EagleBurgmann the reason I am taking this action and stance is that I strongly believe in customer service satisfaction with value added support (the customer must always come first) and I see no other alternative than to present Silverfox Enterprises as the best outcome to Vales [sic] expansion bellows project/operational requirements, based on these circumstances described.
As an extra value adding service, SilverFox Enterprises would consider supplying other products and services such as gaskets for your consideration.
Thank you for considering this expansion bellow supply proposal.
I look forward in hearing from you soon, and if a meeting would be of assistance then I am ready to meet with you anywhere anytime.
In the best interest of VALE.
Kind regards,
SILVERFOX ENTERPRISES Australia P/L
PUMPS, MIXERS & Accessories"
By email of 28 February 2011 Mr Kindinger instructed Mr Leabeater that "... If Goro sends you an inquiry/order, tell them to go to NZ!".
Between April and 5 August 2011 Silverfox supplied Vale with expansion joints in a number of transactions.
On about 8 August 2011 Mr Leabeater informed Mr Kindinger that Silverfox was his company, and that he had an agency with Landia to distribute its products. Mr Kindinger made no objection as Landia was not regarded as a competitor of EBAU.
On about 24 August 2011, whilst in EBI's offices in Singapore, Mr Kindinger was provided with a copy of Mr Leabeater's email to Mr Preston of 17 February 2011.
On 29 August 2011 Mr Kindinger questioned Mr Leabeater about his email of 17 February 2011. His unchallenged version of the conversation (aff 24.02.12, par 60) included:
"Mr Leabeater: I was frustrated with the decision that we couldn't deal with Goro. It was all political. No one thought of the customer. I felt the customer needed to be looked after and I was in a position to help them using my company.
Me: I already told you before that wasn't an option.
Mr Leabeater: I felt the risk was worth taking, even if it meant losing my job. New Zealand cannot support Goro."
Mr Leabeater then resigned his employment with EBAU.
Between September and 30 November 2011 Silverfox supplied Vale with expansion joints in a number of transactions.
Unaflex is a corporation based in Florida, United States of America. It is a manufacturer and supplier of expansion joints and connectors. During 2010 Mr Leabeater visited its factory, met its representatives, and inspected its products. Since then Unaflex has been a source of expansion joints and other products which EBAU supplies to its customers, although its supply of Unaflex expansion joints to Vale ceased in February 2011.
The Fiduciary issues
The transactions
EBAU claims an account of profits for the following transactions undertaken by Mr Leabeater and Silverfox. All were conducted without EBAU's knowledge or consent.
1 Blue Water: invoice no. 416
The Blue Water Joint Venture (BW) undertook the building and operation of the Sydney desalination plant at Kurnell. Between November 2008 and May 2011 EBAU supplied expansion joints to it in transactions for which Mr Leabeater was responsible.
On 4 July 2008 Landia informed Mr Leabeater that it had been awarded a contract by BW to provide submersible mixers. On 18 April 2009 Silverfox invoiced Landia for sales commission in the amount of Eu 12,185 for introducing it to BW. On 17 August 2009 Silverfox received payment of the amount of $20,438.06.
Liability is denied on the ground that the transaction concerned the supply by Landia of products to BW not in competition with EBAU's business with BW. It was also contended that it was a transaction concerning the pump business of Silverfox of which Mr Kindinger approved.
2 Blue Water: invoice no. 422
On 12 January 2010 BW asked Silverfox, through Mr Leabeater, to provide a quotation for various products including mechanical shaft seals. Mechanical seals, including mechanical shaft seals were, and are, products manufactured and supplied by EBAU. Mr Leabeater forwarded the request to Landia.
On 19 February 2010 BW issued a purchase order to Silverfox for the parts. Landia supplied the parts to Silverfox for which, on 31 March 2010, Silverfox invoiced BW for a total amount of $10,776 (ex GST). Of this amount EBAU's claim is in respect of the amount for the mechanical shaft seals, $1,788, of which the amount of $757.76 is claimed as profit on this transaction.
Liability is denied on the ground that this item should be treated as part of a total order of parts for pumps, not in competition with EBAU. Liability was also denied on the ground that any fiduciary duty of Mr Leabeater was limited to dealing with expansion joints and did not preclude profiting from the sale of this item.
3. Vale: invoice no. 428
On 18 April 2011 Vale asked Mr Leabeater to quote for the supply of five metres of plastic strip for bonding of expansion joints, which was an EBAU product. On behalf of Silverfox, Mr Leabeater quoted to supply the item for $160 (ex GST). The quote was accepted, and Silverfox issued an invoice to Vale on 19 April 2011 and shipped the item.
Mr Leabeater accepted that the item was taken by him from EBAU's warehouse, without disclosure, and that it was not paid for. It is conceded that this sale was in breach of his fiduciary duty.
4. Vale: invoice no. 430
On 27 May 2011 Vale asked Mr Leabeater to quote for the supply of expansion bellows or joints. In due course Unaflex supplied the goods to Silverfox for which, on 22 June 2011, Silverfox invoiced Vale for the amount of $5,400 (ex GST).
Liability is denied on the ground that as it was a sale to Vale in New Caledonia it was a sale EBAU was unable to meet and, hence, outside the scope of Mr Leabeater's fiduciary duty.
5. Vale: invoice no. 431
On 14 June 2011 Vale asked Mr Leabeater to quote for the supply of expansion joints for which, on the same day, he obtained a quote from Unaflex. Silverfox provided a quote to Vale on 15 June 2011.
On 15 June 2011 Vale asked EBNZ for a similar quote.
On 16 June 2011 at 6.34am, this request was forwarded by EBNZ to Mr Leabeater, who was asked to advise where the joints came from when last supplied. At 8.34am EBNZ repeated the request. Having received no response, EBNZ emailed Mr Kindinger for the information at 3.13pm. At 7.30pm, Mr Leabeater replied with the suggestion that the information should be sought from EagleBurgmann Denmark.
By email of 16 June 2011 at 7.05pm to Vale, Mr Leabeater provided a revised quotation. It included the following:
"3. We request Vale to respect our wishes, NOT to disclose our name/details (Silverfox Enterprises) to any of the competitors."
By emails of 16 June 2011 at 9.07pm, and 20 June 2011 EBNZ again requested Mr Leabeater for the information and the identity of the supplier.
On 15 July 2011 Vale's purchase order was sent to Mr Leabeater. Silverfox issued a purchase order to Unaflex the same day, and Unaflex issued an invoice on 29 July 2011. On 5 August 2011 Silverfox issued its invoice to Vale in the amount of $108,878 (ex GST).
The ground of denial of liability is the same as that for invoice no. 430.
6. Vale: invoice no. 433(2)
On 25 July 2011 Vale asked Mr Leabeater to quote for the supply of seven expansion bellows. The same day Silverfox obtained a quote from Unaflex. On 5 August 2011 Vale issued a purchase order to Silverfox for these goods.
On 5 August 2011 Silverfox invoiced Vale for two of the expansion bellows in the amount of $1,800 (ex GST). On 7 September 2011 it invoiced Vale for the remaining five expansion bellows in the amount of $4,500 (ex GST).
The ground of denial of liability is the same as that for invoice no. 430.
7. Vale: invoice no. 432
On 25 July 2011 Vale asked Mr Leabeater to quote for the supply of expansion joints. The email was sent to his EBAU address, and the request was directed to EBAU. The same day, Mr Leabeater obtained a quote from Unaflex.
On 26 July 2011 Mr Leabeater advised Vale that Silverfox would be responsible for the supply of the goods. Unaflex supplied the goods to Silverfox for which, on 12 September 2011, Silverfox invoiced Vale for the amount of $15,850 (ex GST).
The ground of denial of liability is the same as that for invoice no. 430.
8. Vale: invoice no. 435
On 12 September 2011 Vale issued a purchase order to Silverfox for the supply of expansion joints. Unaflex subsequently supplied the goods to Silverfox for which, on 12 September 2011, Silverfox invoiced Vale for the amount of $5,950 (ex GST).
Liability is denied on the ground that the transaction was not in breach of Mr Leabeater's fiduciary duty as his employment had ceased, and also, as for invoice no. 430, it was a sale EBAU was unable to meet and hence outside the scope of Mr Leabeater's fiduciary duty.
9. Vale: invoice no. 437
On 30 September 2011 Mr Leabeater provided a quote to Vale for the supply of expansion joints, for which Vale issued a purchase order on 7 October 2011. Unaflex supplied the goods to Silverfox for which, on 7 October 2011, Silverfox invoiced Vale for the amount of $13,332 (ex GST).
Liability is denied on the same grounds as for invoice no. 435.
10. Vale: invoice no. 439
On 6 October 2011 Vale asked Mr Leabeater to quote for the supply of expansion bellows for which, on the same day, he obtained a quote from Unaflex. Unaflex supplied the goods to Silverfox for which, on 21 November 2011, Silverfox invoiced Vale for the amount of $33,120 (ex GST).
Liability is denied on the same grounds as for invoice no. 435.
11. Vale: invoice no. 442
On 29 November 2011 Vale asked Mr Leabeater to quote for the supply of expansion joints, for which, on the same day, he obtained a quote from Unaflex. Unaflex supplied the goods to Silverfox for which, on 30 November 2011, Silverfox invoiced Vale for the amount of $5,950 (ex GST).
Liability is denied on the same grounds as for invoice no. 435.
The principles
The relationship of employee and employer has for long been accepted as a fiduciary relationship being one of trust and confidence. In so holding, in Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, pp 96-97, Mason J proceeded:
"... The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions "for", "on behalf of", and "in the interests of" signify that the fiduciary acts in a "representative" character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal.
...
That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction."
A summary of relevant principles was provided in Streeter & Ors v Western Areas Exploration Pty Ltd [2011] WASCA 17; (2011) 278 ALR 291 by Murphy JA as follows:
"364 The critical feature of a fiduciary relationship is that the fiduciary undertakes or agrees to act for or in the interest of another person. The fiduciary acts in a representative character: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96-7; 55 ALR 417 at 454 ; 4 IPR 291 at 329 ; [1984] HCA 64 (Hospital Products).
365 The essence of a fiduciary relationship is that one party exercises power on behalf of another and pledges himself or herself to act in the best interests of the other: Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; 180 ALR 249; 38 ACSR 122; [2001] HCA 31 at [71] (Pilmer).
366 Within the scope of the fiduciary relationship the fiduciary must give undivided loyalty to the person to whom the obligation is owed: Breen v Williams (1996) 186 CLR 71 at 93 and 108; 138 ALR 259 at 273-4 and 285; [1996] HCA 57 (Breen); Maguireat CLR 465; ALR 738. Within that scope, fiduciaries must subordinate their own interests to the interests of the other person to whom they stand in a fiduciary relationship: Furs Ltd v Tomkies (1936) 54 CLR 583 at 590 (Furs) per Latham CJ.
367 The undivided loyalty is secured by the general principle of equity concerning the obligation of a person in a fiduciary relationship to account for undisclosed personal benefits or gains ...
370 Fiduciaries cannot unilaterally absolve themselves of liability by resigning from fiduciary office in order to take the profit for which they should otherwise account: Green & Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1 (Green & Clara); Canadian Aero Services Ltd v O'Malley [1974] SCR 592 at 613 (Canadian Aero); Ex parte James (1803) 8 Ves 337; 32 ER 385 at 390-1. The last-mentioned case concerned a solicitor for the trustee in bankruptcy purchasing certain property of the bankrupt's estate. There arose a question as to whether the solicitor could, by resigning from his position, divest himself of any liability attaching as a consequence of his breach of fiduciary duty. Lord Eldon said:
'With respect to the question, now put, whether I will permit [the solicitor] to give up the office of solicitor, and to bid, I cannot give that permission. If the principle is right, that the solicitor cannot buy, it would lead to all the mischief of acting up to the point of sale, getting all the information, that may be useful to him, then discharging himself from the character of solicitor, and buying the property (390-391).'"
In Breen v Williams [1996] HCA 57; (1995-1996) 186 CLR 71, p 108, Gaudron and McHugh JJ said:
"The law of fiduciary duty rests not so much on morality or conscience as on the acceptance of the implications of the biblical injunction that '[n]o man can serve two masters'. Duty and self- interest, like God and Mammon, make inconsistent calls on the faithful. Equity solves the problem in a practical way by insisting that fiduciaries give undivided loyalty to the persons whom they serve."
In Meagher, Gummow and Lehane, Equity: Doctrines and Remedies; 4th Ed, par 5-005 it was explained:
"The distinguishing characteristic of a fiduciary relationship is that its essence, or purpose, is to serve exclusively the interest of a person or group of persons; or, to put it negatively, it is a relationship in which the parties are not each free to pursue their separate interests."
In Furs Ltd v Tomkies & Ors [1936] HCA 3; (1935-1936) 54 CLR 583, p 592, Rich, Dixon and Evatt JJ addressed the fiduciary relationship of a director in words of general application:
"An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company. It is no answer to the application of the rule that the profit is of a kind which the company could not itself have obtained, or that no loss is caused to the company by the gain of the director. It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company. If, when it is his duty to safeguard and further the interests of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self interest, beyond which it is neither wise nor practicable for the law to look for a criterion of liability ..."
In Warman International Ltd & Ors v Dwyer & Ors [1995] HCA 18; (1994-1995) 182 CLR 544, pp 557-558 it was held:
"A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position. The stringent rule that the fiduciary cannot profit from his trust is said to have two purposes: (1) that the fiduciary must account for what has been acquired at the expense of the trust, and (2) to ensure that fiduciaries generally conduct themselves "at a level higher than that trodden by the crowd". The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage.
Thus, it is no defence that the plaintiff was unwilling, unlikely or unable to make the profits for which an account is taken or that the fiduciary acted honestly and reasonably. So, in Regal (Hastings) Ltd. v Gulliver, although the directors acted in good faith and in the interests of the company of which they were directors in taking up shares in a subsidiary which the company could not afford to take up, they were held accountable for the profit made on the sale of the shares. And, in Phipps v Boardman, the solicitor was held accountable for the profit he made, notwithstanding that he acted bona fide and in the interests of the trust and that the opportunity would not have been availed of but for his skill and knowledge."
Fiduciary obligations in the employment context are not limited to senior executives and officers, and may in appropriate circumstances extend to other employees (Colour Control Centre v Ty (1996) 39 AILR 5-058 per Santow J).
In Spotless Group Ltd v Blanco Catering Pty Ltd [2011] FCA 979; (2011) 93 IPR 235 Mansfield J observed:
"25 It is plain that an employee is not entitled to use knowledge of opportunities or other advantages arising out of their employment to make personal gain: Robb v Green [1895] 2 QB 1, certainly without the informed consent of the employer. That extends to the use of trade secrets or other less confidential information obtained during employment for personal advantage, provided the information was not routinely available in the market place. In Esme Pty Ltd v Parker [1972] WAR 52, an employee used his knowledge of his employer's quotation techniques to tender for a contract in competition with his employer. His conduct was found to be in breach of duty even though his employer's quotation was unlikely to have been accepted in any event, regardless of the tendering by the employee. In Coordinated Industries v Elliott (1998) 43 NSWLR 282 at 287, it was said that where knowledge of a business opportunity was acquired in the course of employment, which opportunity may never have been pursued by the employer, it is enough to show that such knowledge was gained in the course of the employment to prevent the employee, without proper disclosure, from using it."
In Streeter, McLure P said:
"77 The High Court's formulation of the profit rule in Warman International Ltd v Dwyer and Chan v Zacharia focuses attention on the conduct of the fiduciary. There must be a causal connection between the fiduciary office and the receipt of the benefit. The "opportunity" referred to in the profit rule is that taken by the fiduciary to obtain the profit. If the opportunity is derived by reason of his fiduciary position, it is irrelevant that the company to whom the duty is owed was unwilling, unlikely or unable to make the profits for which an account is taken or that the fiduciary acted honestly and reasonably: Warman International v Dwyer (588); Maguire v Makaronis (468); Boardman v Phipps [1967] 2 AC 46."
Determination
On the pleadings (points of defence, par 23(a)) it was admitted that Mr Leabeater was in a position of trust and confidence during the period in which he was employed by EBAU, but not thereafter. It was not admitted that in the course of his employment Mr Leabeater owed fiduciary duties which included loyalty, and to act in all his dealings in the best interests of EBAU, and to protect the business of EBAU, and not to favour his own interest, or the interests of any other party, over the interests of EBAU.
It was Mr Leabeater's position that the duty asserted by EBAU was not a fiduciary duty arising out of his employment relationship, but was a duty derived only from his employment contract. It was put that his employment as a salesman did not attract fiduciary duties, including a duty of loyalty to which senior employees, such as executives or directors, may be subject. It was put that the scope of any fiduciary duty was to be ascertained with regard to his employment as a salesman of expansion joints in designated territories, and that under his contract he was not precluded from other activities which did not compete with EBAU, or with his time commitments. Accordingly, so it was put, it could not have been a breach of fiduciary duty for Mr Leabeater to sell expansion joints to Vale after EBAU had ceased to do so in February 2011, and no longer competed for Vale's business.
Although it was accepted that Mr Leabeater's failure to obey Mr Kindinger's instruction to refer Vale to EBNZ, and that use of contacts and knowledge assisted him in winning orders for Vale at the expense of EBNZ may have been conduct in breach of the employment contract, in the circumstances it was submitted that there was no breach of fiduciary duty with liability to account for profits. In short, Mr Leabeater submitted that the scope of his fiduciary duty was limited to that of selling expansion joints into territories designated under the employment contract which, at relevant times, no longer included New Caledonia. Accordingly, it was put that there was no breach or conflict in selling expansion joints to Vale, which was located in an area vacated by EBAU, and with which EBAU had ceased trading.
I have earlier referred (pars 9, 10, 11) to the evidence of Mr Leabeater's role with EBAU as a salesman with specialist knowledge in expansion joints and of the peculiar requirements of customers for them. It shows over a long time he developed a close relationship with customers as EBAU's "one-man band" in the expansion joint business. This relationship was critical for EBAU's success in a competitive market, and it is evident EBAU relied upon him to achieve significant financial returns.
In my opinion, there is ample evidence for the finding, which I make, that as a senior employee acting in a representative capacity Mr Leabeater was in a fiduciary relationship with EBAU. This conclusion is reinforced by reference to their relationship under the employment contract which included express terms under which Mr Leabeater was bound to devote his time to EBAU's business, to exercise the utmost good faith, not to place himself in a position of conflict of interest, and to comply with instructions given to him (cl 1, cl 7.1, cl 7.2, cl 7.3). Mr Leabeater correctly pleaded that he was in a position of trust and confidence whilst employed by EBAU.
As the authorities show, a fiduciary must give undivided loyalty to the person to whom the obligation is owed, and must subordinate his own interests to those of the other person with whom he stands in a fiduciary relationship. Furthermore, a fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position (Warman pp 557-558; Spotless par 25).
I turn now to the Vale transactions. In this context, the circumstances in which Mr Leabeater and Silverfox dealt with Vale should be recalled. The following is a summary.
On 18 December 2009 EBI confirmed to Mr Kindinger its instruction that EBNZ was to attend to the supply of all products, including expansion joints, to New Caledonia. Mr Leabeater was so informed by Mr Kindinger on 21 December 2009. In about mid-February 2011 Mr Kindinger instructed Mr Leabeater to refer enquiries from Vale to EBNZ. He expressly rejected Mr Leabeater's request to allow the business to be conducted through Silverfox. The instruction was confirmed in an email to Mr Leabeater on 28 February 2011.
Following Vale's request of 13 February 2011 to Mr Leabeater for a quotation for the Goro project, Mr Leabeater sent Mr Preston of Vale the email of 17 February 2011, the terms of which are set out above (par 18). In support of his proposal that Vale's requirements be directed to Silverfox, he referred to his familiarity with Vale's operations, and continued:
"To enable a smooth transition for expansion bellows without any interruptions to Vales [sic] operations, SilverFox can immediately manage your RFQs/Orders from project/operations without any changes occurring to the product type, quality, service, technical support, price and delivery. As stated in my introduction, the reason for the immediate smooth transition is that I (Ross Leabeater) will be looking after your expansion bellows business and I can absolutely 100% guarantee you I will deliver the same professional service and conduct or better than what you have been obtaining from EBAU/Ross Leabeater. In other words it's the person that you are doing business with which really determines the service outcome.
I would appreciate if you would keep this proposal confidential from EagleBurgmann the reason I am taking this action and stance is that I strongly believe in customer service satisfaction with value added support (the customer must always come first) and I see no other alternative than to present Silverfox Enterprises as the best outcome to Vales [sic] expansion bellows project/operational requirements, based on these circumstances described."
Under cross-examination, Mr Leabeater accepted that the purpose of the email was to get Vale's business for Silverfox, and that he was the vehicle to secure this business for the benefit of himself and the company as he needed to live, and earn money (T p 98). He explained the request for confidentiality as follows (T p 90, l 26 - l 35):
"Q. Maybe, but what you were seeking to do because you wanted to live a life was by this means to at least take away business from EBNZ?
A. Maybe so.
Q. And if EBAU found out that you were moving to take away business from EBNZ you appreciated that they would be pretty cross about it and that's why you were seeking to have it kept confidential?
A. I knew if Eagleburgmann New Zealand or Eagleburgmann Singapore found out then I knew that they would want me out. I just knew from what had transpired since 2008 to lead to the situation."
On the occasion of his resignation from EBAU on 29 August 2011 he told Mr Kindinger that he felt the risk of trading with Vale was worth taking, even if it meant losing his job.
It is beyond argument that Mr Leabeater's fiduciary and contractual duties required him to serve EBAU's interests, not his own. After it had been arranged for EBNZ to deal with customers in New Caledonia, EBAU's interests involved compliance with EBI's direction to refer enquiries from Vale to EBNZ for the purpose, it may be assumed, of keeping Vale's business within, and advancing the interests of, the group. Mr Leabeater was instructed to facilitate that arrangement by referring Vale's business to EBNZ. This he failed to do. Instead, he seized the opportunity to exploit for himself and his alter ego, Silverfox, the relationship with Vale and Unaflex which he had obtained by the position he had occupied as an employee. Furthermore, in my opinion, his concern for secrecy as expressed in his emails to Vale of 17 February and 16 June 2011 supports the inference that he well understood that what he was doing was wrong, absent disclosure to, and consent of, EBAU. Put another way it indicates that he was aware that his conduct in advancing his private interests conflicted with this duty to his employer and, as he said, was likely to cause his dismissal.
The evidence established that Mr Leabeater took advantage of the opportunity and knowledge derived from his fiduciary position to procure for Silverfox the disputed transactions with Vale. Every opportunity which Mr Leabeater received was directly attributable to the knowledge and experience gained whilst employed by EBAU. Accordingly he must account to EBAU for the profit or benefit derived there from. Furthermore, in my opinion, it is entirely irrelevant on the issue of existence or breach of fiduciary duty that EBAU was no longer in a position to supply expansion joints to Vale and/or that Silverfox was not in direct competition for that business (Warman p 558).
It was conceded that the transaction the subject of invoice no. 428 was one in breach of fiduciary duty. Accordingly, it must be accounted for.
Liability to account for the transactions the subject of invoice nos. 430, 431, 433(2), and 435 was denied on the basis that they involved no breach of fiduciary duty as they were for orders which EBAU was unable to service. As EBAU's inability is no defence, there must be an accounting for these transactions (Warman p 558; Streeter par 77).
Liability to account for the transactions the subject of invoice nos. 435, 437, 439, and 442 was denied on the ground of EBAU's inability to service the orders, and also on the ground that they had taken place after the cessation of Mr Leabeater's employment. The defence cannot be sustained. The transactions were directly attributable to the opportunity and knowledge derived from Mr Leabeater's fiduciary position during his employment, for which liability to account endures after his employment ceased (Streeter pars 77, 370).
Relevant to the BW transactions the subject of invoice nos. 416 and 422 is the evidence that, although Mr Leabeater informed Mr Kindinger of the existence of the Silverfox agency arrangement with Landia in August 2011, at no time was disclosure made of, or consent sought for, these transactions which took place in 2009 and 2010 respectively.
In my opinion, the commission paid by Landia on invoice no. 416 should be regarded as a secret commission which was a benefit directly attributable to, and resulting from, his fiduciary position. With respect to the payment received on invoice no. 422, it must also be regarded as a profit or benefit similarly derived. Accordingly, I find that liability to account for the proceeds received from these transactions must be accounted for.
Additional transactions
In support of its claim for injunctive relief, EBAU relied on two other transactions through Silverfox for the sale of expansion joints. EBAU does not seek an account of profits from them.
On about 24 October 2011 Kempe Maintenance & Engineering Service SA asked Mr Leabeater to quote for the supply of expansion joints. In due course Unaflex supplied the goods to Silverfox for which, on 4 January 2012, Silverfox invoiced the company for the amount of $4,188 excluding GST (invoice no. 441). The company was, and remains, a customer of EBAU.
On about 1 December 2011 Corrosion Technology Australia Pty Ltd asked Mr Leabeater to quote for the supply of various products, including expansion joints. In due course Unaflex supplied the goods to Silverfox for which, on 6 January 2012, Silverfox invoiced the company for the amount of $2,247 excluding GST (invoice no. 444).
The claim under s 182(1)
As to EBAU's claim against Mr Leabeater under s 182(1) of the Act, he admitted (points of defence par 27) that at all material times, by reason of his position as an employee of EBAU, he owed a duty not to use his position improperly to gain an advantage for himself, or someone else, or cause detriment to EBAU in contravention of this provision.
It follows from findings already made that Mr Leabeater's conduct in respect of the Vale and BW transactions was also conduct as the director of Silverfox in contravention of s 182(1), which provides:
"182 Use of position - civil obligations
Use of position - directors, other officers and employees
(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation."
No elaboration is required for this conclusion, having regard to the following statement from R v Byrnes [1995] HCA 1; (1995) 183 CLR 501, p 517:
"...a director who takes part in a decision to enter into a transaction in which the director or a third party in whom the director has an interest or to whom the director owes a fiduciary duty stands to gain an advantage or benefit but who does not make an adequate disclosure of his interest acts improperly."
Accordingly, in my opinion, EBAU has established its entitlement to an account from Mr Leabeater by reason, also, of his contravention of s 182(1).
The just allowance issue
EBAU claims an account of profits by each of Mr Leabeater and Silverfox as a consequence of Mr Leabeater's breach of fiduciary duty with Silverfox's knowing assistance. Silverfox was at all times run as Mr Leabeater's alter ego; the conclusion is inevitable that it was a knowing and active participant in his breaches of fiduciary duty and, hence, liable to account to EBAU for any profit or benefit received as a result of such participation (Warman pp 564, 565). The approaches which may be taken were explained in Hospital Products by Mason J (p 110):
"... One approach, more favourable to the fiduciary, is that he should be held liable to account as constructive trustee not of the entire business but of the particular benefits which flowed to him in breach of his duty. Another approach, less favourable to the fiduciary, is that he should be held accountable for the entire business and its profits, due allowance being made for the time, energy, skill and financial contribution that he has expended or made. In In re Jarvis, Upjohn J. observed, correctly in my opinion, that it is not possible to say that one approach is universally to be preferred to the other, for each case depends on its own facts and the form of inquiry which ought to be directed must vary according to the circumstances. In each case the form of inquiry to be directed is that which will reflect as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty."
In Warman it was said (p 558):
"... The assessment of the profit will often be extremely difficult in practice; accordingly it has been said that "[w]hat will be required on the inquiry ... will not be mathematical exactness but only a reasonable approximation". What is necessary however is to determine as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty ..."
and (pp 561-562):
"... In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal's goodwill over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. That may well be the case when it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal's property has been exposed. Then it may be said that the relevant proportion of the increased profits is not the product or consequence of the plaintiff's property but the product of the fiduciary's skill, efforts, property and resources. This is not to say that the liability of a fiduciary to account should be governed by the doctrine of unjust enrichment, though that doctrine may well have a useful part to play; it is simply to say that the stringent rule requiring a fiduciary to account for profits can be carried to extremes and that in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff.
It is for the defendant to establish that it is inequitable to order an account of the entire profits. If the defendant does not establish that that would be so, then the defendant must bear the consequences of mingling the profits attributable to the defendant's breach of fiduciary duty and the profits attributable to those earned by the defendant's efforts and investment, in the same way that a trustee of a mixed fund bears the onus of distinguishing what is his own.
Whether it is appropriate to allow an errant fiduciary a proportion of profits or to make an allowance in respect of skill, expertise and other expenses is a matter of judgment which will depend on the facts of the given case. However, as a general rule, in conformity with the principle that a fiduciary must not profit from a breach of fiduciary duty, a court will not apportion profits in the absence of an antecedent arrangement for profit-sharing but will make allowance for skill, expertise and other expenses ..."
and (p 565):
"In determining the proper basis for an account of profits, it is of first importance in this, as in other cases, to ascertain precisely what it was that was acquired in consequence of the fiduciary's breach of duty."
In Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298 Heydon JA, with reference to the above passage in Warman, said:
"335 If it is for the defendant to establish that it is inequitable to order an account of the entire profits, it follows that the onus on the defendant is to negate dishonesty or other grave forms of misconduct, and hence the position is not so much that an account of the entire profits is a punishment, but rather that an absence of grave misconduct is a passport to an indulgence in favour of the defendant. And the closing sentence of the quotation suggests that, since the onus of establishing an entitlement to apportionment of profits is on the defendant, but that the grant of an allowance is normally the substitute for that remedy, the onus of establishing that an allowance is called for is on the defendant.
336 Hence the denial to a dishonest fiduciary of a share of the profits or of an allowance is not an instance of punishment. It is for the fiduciary to establish that the ordinary rule in relation to an account of profits should not be applied. In England, the onus seems to require the establishment of 'exceptional' or 'unusual' circumstances. In Australia, the High Court seems to suggest that the onus is lighter, but that it remains on the fiduciary."
The question for determination is the assessment of the profit or benefit obtained by Mr Leabeater and/or Silverfox in breach of duty. The court's task is not usually one of mathematical precision. Mr Leabeater and Silverfox bear the onus of showing that neither should be ordered to account for the entire profits, and that the assessment should make some just allowance for time, effort, and skill expended on the transaction. It is for them to prove the basis for quantification of the allowance and, necessarily, the reasonableness of the components which the court is asked to take into account. The outcome requires the exercise of a judicial discretion depending on the particular facts of the case.
EBAU seeks an award of $101,987.55. This amount represents the gross profit from the Vale and BW transactions calculated in accordance with the approach taken by its expert accountant, Mr Michael Potter. It includes the amount of $81,549.49 which represents gross profit in the amount of $57,084.64 gained by Silverfox from sales, grossed up to allow for corporate tax at the rate of 30 per cent. It also includes the amount of $20,438.06 sales commission paid by Landia in August 2009.
The defendants' disputed EBAU's entitlement to the amount claimed. Although there was a minimal difference between the calculation of gross profit by Mr Potter and that calculated by the defendants' expert accountant Mr Chris Katehos, the defendants contended that EBAU's claim failed to fairly allow for the time, effort and expenses incurred in generating the profits from the transactions. The substantial dispute concerned the items which the defendants' contended should be taken into account, and the quantification of them. These items were:
(1) The market value of Mr Leabeater's time in achieving relevant sales. It was put that the best indication of that value as a salesman was the remuneration paid to him by EBAU at the time he ceased employment. It included salary of $86,000 per annum, plus superannuation, a motor vehicle, laptop computer, and sales commission of two per cent.
(2) The use of a motor vehicle on the basis that it would be part of a commercial employment package, and also that it is necessary for calling upon customers of the business.
(3) Office space and other necessary costs.
EBAU contends that, in the circumstances, an order should be made requiring an account of the entire profits of the Silverfox business relating to the transactions, on the basis that the court was without evidence upon which an assessment of an allowance as claimed by the defendants could be made.
Mr Leabeater said he had no records of the time spent on any transaction. He accepted that his estimates were guesses, without material to support them. Estimates given in chief were reduced markedly in cross-examination without plausible explanation. For example, time spent on transactions for invoices nos. 432 and 437 was first said to be one day for each, but, in cross-examination, was said to be one hour for each. This is to be contrasted with earlier evidence (aff 15.03.12, par 61) of an estimate of about 40 hours spent in obtaining each order. Evidence about the other transactions was to similar effect. In response to the suggestion that his first estimates were wildly exaggerated, Mr Leabeater said (T p 144) that he "... was put on the spot ... and had to guess".
Mr Leabeater said that Silverfox operated from one of about seven rooms at his home at Ashford, for which he paid rent of $560 per fortnight. He said that much of the work was performed on a laptop computer; some when at home, and some whilst at work with EBAU. He purchased a motor vehicle in October 2011 which he used on trips for Silverfox's business, such as canvassing customers. He gave no evidence that Silverfox paid, or was liable to pay, any proportion of rent, or any amount in respect of the motor vehicle. In any event, no attempt was made to establish that any transaction involved the use of a motor vehicle. He gave no evidence that it was proposed that Silverfox would make any payment referrable to the transactions, at some future time, or that any claim would be made by him to Silverfox for any such payment.
Upon an overall assessment of Mr Leabeater's evidence, my conclusion is that it provides no safe support for findings necessary for the quantification of any allowance as claimed by the defendants.
Clause 9.2 specifies the period and territories for which the restraint operates. The issue between the parties was whether, upon its proper construction, the territories designated by the phrase "in respect of" were to be understood to be the territories in which the operation of the business under cl 9.1 was precluded, or, as the defendants' submitted, the territories in which the customers of the business were located.
In my opinion the meaning of cl 9.2 for which the defendants contended must be rejected. When read together, cl 9.1 and cl 9.2 disclose the intention to first describe the business activity the subject of restraint, and then to separately provide for the duration and geographic limit of the restraint. Consistently, the words of cl 9.3 (for example "This restraint, insofar as it relates to any business or activity set forth in subclause 9.1 above, and any province or territory set forth in subclause 9.2 above ...") reflect the different components of the restraint under these provisions. Accordingly, in my opinion, the effect of cl 9.2 is to restrain Mr Leabeater from involvement in a competing business which is carried on in Australia and New Zealand for the period of his employment with EBAU, and for one year after the termination of his employment.
There can be no doubt that Silverfox, at all relevant times, has been carrying on operations similar to, and in competition with EBAU. This was established by Mr Leabeater himself who said (aff 15.03.12):
"53 Since the commencement of these proceedings, Silverfox has adopted a general marking plan which neither targets nor excludes EagleBurgmann customers. It does not distinguish in any way between any company which is, was or never was an EagleBurgmann customer."
In Mr Leabeater's correspondence with customers, it was frequently represented that Silverfox carried on business as a supplier of products including expansion joints. He said that since ceasing employment he has targeted users of expansion joints whether or not an EBAU customer, and that Silverfox is an agent for the organisation LNH International, a manufacturer and supplier of expansion joints. Also, Silverfox published a catalogue (the format and content of which were lifted from a Unaflex publication) of the expansion joints and connectors it was marketing.
In my opinion, the application of cl 9.1 requires the consideration of the business operations of Silverfox and EBAU in each case, as a whole, and not on a transaction by transaction basis. It follows, and I find, that Mr Leabeater's interest in and involvement with Silverfox has been, and continues to be, in breach of cl 9.1
On the issue of reasonableness, I refer to the findings as to Mr Leabeater's duties, status, and role with EBAU earlier made (pars 9, 10, 11, 70, 71, 79). Evidently he knew of the basis upon which EBAU quoted for jobs, and the terms on which it dealt with its customers. As the "one-man band" production manager of expansion joints, Mr Leabeater understood the approach EBAU adopted in winning jobs, servicing customers, and developing opportunities. Employment of Mr Leabeater with his reservoir of knowledge, experience, and contacts built up over many years would give a competitor a significant advantage. The reality of this prospect was graphically illustrated in Mr Leabeater's email of 17 February 2011 by which he induced Vale to trade with Silverfox. It included the following:
"... I have many reasons for this stance, the main reason is familiarity with Vale's operations and expansion bellow requirements, I know EBNZ have limited knowledge and experience to offer and don't have the necessary skill, tools, information to perform adequately and additionally they will be going through an agent based in New Caledonia which will further complicate the service with unnecessary delays, misunderstandings and confusion.
...
As I stated in my introduction, the reason for the immediate smooth transition is that I (Ross Leabeater) will be looking after your expansion bellows business and I can absolutely 100% guarantee you I will deliver the same professional service and conduct or better than what you have been obtaining from EBAU/Ross Leabeater. In other words it's the person that you are doing business with which really determines the service outcome."
As the cases show, an employer's customer connection is an interest which can support a reasonable and legitimate restraint of trade, particularly if the employee is the person who represents the business to the customer (Jardin par 97, Cactus Imaging par 25, Koops par 44).
The underlying purpose of Mr Leabeater's employment was to obtain and develop custom for EBAU's business, an essential element of which was the establishment of a customer connection in the market. The necessary experience and knowledge he acquired was the product of the training and opportunities provided by EBAU to be used for EBAU's benefit. It was entirely reasonable for EBAU to obtain Mr Leabeater's agreement that, after termination of employment, he would not exploit the special knowledge, experience, relationships, and connections gained during his employment. EBAU's legitimate interest in protection from such exploitation is self-evident and justified.
The restraint precludes involvement in a competing business which carries on operations or business in Australia and New Zealand, but not in other territories. In my assessment, such a restraint for a period of one year after termination of employment is not unreasonable in order to protect EBAU's interests. Accordingly, I uphold the validity of cl 9.1, and cl 9.2 of the employment contract.
I am satisfied that Mr Leabeater has on many occasions contravened these provisions and, unless restrained, will continue to do so. In the circumstances, EBAU has established its entitlement to an injunction in terms of par 2 of the amended summons of 15 March 2012.
Conclusion
I hold that EBAU is entitled to order that there be an account of profits in the amount of $101,987.55, and to an injunction in terms of par 2 of the amended summons of 15 March 2012.
The parties should have the opportunity to agree upon the final terms of the orders to be made to give effect to these reasons, following which EBAU is to bring in short minutes of order.
The question of costs remains outstanding. My prima facie view is that the appropriate order is that the defendants should pay the plaintiff's costs of these proceedings. However, absent agreement, the parties should have the opportunity to make submissions on the issue.
The parties are directed to arrange with my Associate by 4pm 6 June 2012 for the matter to be re-listed for the purpose of making final orders, and for directions as to any argument as to costs.
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Decision last updated: 30 May 2012
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