Earth Force Personnel Pty Ltd v EA Negri Pty Ltd
[2010] VSC 426
•22 September 2010
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
JUDICIAL REVIEW AND APPEALS LIST
No. 2283 of 2010
| EARTH FORCE PERSONNEL PTY LTD ACN 076 309 825 | Appellant |
| v | |
| EA NEGRI PTY LTD ACN 006 251 127 | First Respondent |
| and | |
| EMIL ANTHONY NEGRI | Second Respondent |
---
JUDGE: | HARGRAVE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 1 September 1010 | |
DATE OF JUDGMENT: | 22 September 2010 | |
CASE MAY BE CITED AS: | Earth Force Personnel Pty Ltd v EA Negri Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 426 | |
---
RESTRAINT OF TRADE – Labour hire agreement – Casual workers – Introduction fee payable if worker becomes permanent employee of hirer – Whether in substance a recruitment fee – Whether recruitment fee contracts exempt from restraint of trade principles – Whether ‘trading society test’ should be applied – Whether provision required justification on grounds of reasonableness – Introduction fee provision declared void as an unreasonable restraint of trade – Esso Petroleum Co Ltd v Harper’s Garage (Stouroport) Ltd [1968] AC 269, 331-5; Australian Capital Territory v Munday [2000] 99 FCR 72, [38]-[42], [105] considered and applied.
PENALTY – Introduction fee payable on specified event – Event not a breach of agreement – Whether introduction fee constituted an unenforceable penalty – Held: penalty doctrine of no application in absence of breach – First East Auction Holdings Pty Ltd v Ange [2010] VSC 72, [151]-[158] applied.
---
APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr J J Gleeson SC with Mr D A Ferrari | Harris Legal |
| For the Respondents | Mr J M Shaw | Tisher Liner & Co |
TABLE OF CONTENTS
Parties and introduction.................................................................................................................. 2
Does the condition constitute an unenforceable penalty?....................................................... 3
Did the Magistrate’s decision involve a finding that the condition operated as an unenforceable restraint of trade?.............................................................................................................................. 4
Is the condition unenforceable because it operates as a restraint of trade?......................... 7
Conclusion and orders.................................................................................................................... 12
HIS HONOUR:
Parties and introduction
The appellant, Earth Force Personnel Pty Ltd, is a labour hire company. It supplies contract personnel to commerce and industry on a casual basis.
The first respondent, EA Negri Pty Ltd (‘Negri’) conducts a construction business. From time to time, it requires casual workers. To that end, it entered into a labour hire agreement with Earth Force. Under the agreement, Earth Force agreed to supply workers to Negri as required, on certain terms and conditions.
The condition relevant to this appeal provides that Negri must pay Earth Force a specified introduction fee if it directly employs any worker introduced to it by Earth Force under the labour hire arrangements (’the condition’).
In 2008, Negri required a casual worker to operate heavy machinery on a construction site. Pursuant to the labour hire agreement, Phillip Lancaster worked in that capacity for about six weeks. A week later, he was placed by Earth Force with another company. He performed services for that company for about 10 weeks until, on 3 December 2008, he accepted direct employment by Negri on a permanent basis. In these circumstances, Earth Force invoiced Negri for the introduction fee. Negri did not pay. Earth Force commenced proceedings in the Magistrates’ Court seeking payment of the introduction fee. The second respondent, Emil Negri, was sued as guarantor.
Negri defended the Magistrates’ Court proceeding. It contended that the condition was void because the introduction fee constitutes an unenforceable penalty or operates as an unenforceable restraint of trade.
The Magistrate dismissed Earth Force’s claim. He held that the condition imposed an unenforceable penalty and was void on that ground. The Magistrate also found that the condition operated in restraint of trade. However, Earth Force does not accept that the Magistrate reached a concluded view on the restraint of trade basis. Accordingly, it contends that the restraint of trade issue does not arise on appeal.
The issues for determination are as follows:
(1) Does the condition constitute an unenforceable penalty?
(2) Did the Magistrate’s decision involve a finding that the condition operated as an unenforceable restraint of trade?
(3) If the Magistrate made such a finding: Is the condition unenforceable because it operates as a restraint of trade?
In order to determine these questions, it is necessary to refer to the terms of the condition, which provides:
In the event of [Earth Force] introducing to [Negri] any member of [Earth Force’s] workforce, either through actual hire or information supplied on request by [Negri] or any agent of [Negri], or by information made known to [Negri] of the availability of a particular person, and the client engages that member directly, regardless of the circumstances or conditions under which that engagement occurs, [Negri] agrees to:
(a) Immediately notify [Earth Force] of the engagement,
(b) Pay a fee** to [Earth Force] within fourteen (14) days of confirmation of the engagement.
[Negri] acknowledges that introductions are confidential.
The fee payable to [Earth Force] is [Earth Force’s] assessment of the loss of the resource to [Earth Force] as a result of the direct engagement.
All classifications, including technical personnel, professionals, trades people, semi-skilled and unskilled workers:
**Fee payment is $7521 (seven thousand five hundred and twenty-one dollars)”.[1]
[1]Emphasis in original.
Does the condition constitute an unenforceable penalty?
A payment due under a contract may be classified by a Court as an unenforceable penalty where the obligation to make the payment arises upon a breach of contract. As the law presently stands, the penalty doctrine has no application to payments due on the happening of an event specified in the contract which is not a breach of the contract. I reviewed the relevant authorities to this effect in First East Auction Holdings Pty Ltd v Ange.[2] I see no reason to depart from the view I expressed in that case. However, I note that the decision in First East is under appeal, and that the High Court is yet to finally resolve the issue.
[2][2010] VSC 72, [151]-[158].
It was submitted on behalf of Negri that, on its proper interpretation, the condition prohibited it from engaging Mr Lancaster and that, accordingly, the fee was payable as a result of its breach of contract; thus attracting the operation of the penalty doctrine. I do not accept that submission. The labour hire agreement contains no such prohibition. Had such a prohibition been intended, the agreement would likely have said so in plain terms, such as: ‘Negri must not directly employ any worker introduced to it by Earth Force’. There is no such language in the agreement. Instead, the condition refers to ‘the event’ of Negri directly employing a worker introduced to it under the agreement and provides that, in such an event, a fee is payable. Objectively construed, a reasonable businessperson would understand the condition to allow direct employment, subject to the notification requirement and the payment of a fee.
Accordingly, I find that the penalty doctrine has no application. The Magistrate was wrong to so conclude.
Did the Magistrate’s decision involve a finding that the condition operated as an unenforceable restraint of trade?
Section 109(1) of the Magistrates Court Act 1989 (Vic) confers a right to appeal to this Court from a final order of the Magistrates’ Court in a civil proceeding on a question of law. The right of appeal is limited to questions of law ‘involved in’ the decision underlying the final order.[3]
[3]Wong v Carter & Ors [2000] VSCA 53, [42]-[44], per Tadgell JA (Winneke P and Chernov JA concurring).
It was submitted on behalf of Earth Force that the Magistrate’s final order was based only on one question of law, concerning the operation of the penalty doctrine. Accordingly, the appeal should simply be allowed if this Court finds error in the Magistrate’s decision on that ground. I do not accept that submission.
Some support for the submission is to be found in the final paragraph of the Magistrate’s ex tempore (unrevised) reasons. The Magistrate said:
So is this a penalty? Yes, it is and it would be unenforceable on that ground alone. It’s probably void because of the restraint of trade, but the net effect is the same in both instances.[4]
[4]Emphasis added.
If this concluding paragraph were to be taken on its own, there would be force in the submissions made on behalf of Earth Force. Read alone, the paragraph indicates that the Magistrate has not reached a final conclusion on the question of law raised by the restraint of trade defence. However, reading the reasons as a whole, it is plain that the Magistrate considered the restraint of trade defence and concluded that the restraint of trade doctrine was attracted by the condition, that this placed an onus upon Earth Force to justify the restraint as necessary for its reasonable protection and that Earth Force had failed to satisfy that onus.
While it is true that the Magistrate’s unrevised ex tempore reasons contain some confusing overlap between his consideration of the penalty issue (as to whether the fee constituted a genuine pre-estimate of loss) and the restraint of trade issue (as to whether the fee was reasonably necessary to protect Earth Force’s interests), that overlap does not undermine the essential fact that the Magistrate arrived at a conclusion on the restraint of trade issue, and that the finding necessarily involved a question of law.
The Magistrate referred to the formulation of the restraint of trade doctrine by Lord McNaughten in Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co,[5] to the effect that all restraints of trade are, as a general rule, void as contrary to public policy unless the particular restraint at issue is excepted from the general rule because it is justified as reasonable. The Magistrate then stated the issue and his conclusion in this way:
Is it [the condition imposing the introduction fee] an exception to the general rule stated by Lord McNaughten? The answer is no, for the reasons that I give.
[5][1894]AC 535, 565.
The Magistrate’s reference to ‘the reasons that I give’ should be understood as a reference to his previous discussion of the Nordenfelt principle and its application to the facts of this case. In that discussion, the Magistrate emphasised that the obligation to pay the introduction fee was an obligation of ‘unlimited duration to pay a sizable amount of money’. Further, the Magistrate emphasised that the introduction fee was payable irrespective of the classification of the worker at issue.
Reading the Magistrate’s reasons as a whole, it is apparent that the above matters constituted his reasons for concluding that Earth Force had failed to satisfy its onus to establish that the obligation to pay the introduction fee operated reasonably as between the parties. Whether or not the Magistrate’s conclusion was right, or whether he approached the essential issues for determination in an appropriate manner, is not to the point. The sole submission by Earth Force was that the Magistrate did not express a conclusion on the restraint of trade issue. The Magistrate’s reasons were not attacked on the ground of inadequacy, for example because they failed to disclose the path of reasoning leading to any conclusion reached.
Further, as to the final paragraph of the Magistrate’s reasons, it is noteworthy that he was under time pressure to conclude his judgment. In the circumstances, the loose language in his conclusion should not detract from his finding on the restraint of trade issue. However, the looseness of the language in the final paragraph, together with the overlap to which I have referred, highlights the need for judicial officers to revise the transcript of ex tempore reasons, particularly where the reasons justify a final order in the proceeding.
Accordingly, I conclude that the Magistrate’s decision involved a finding on the restraint of trade issue and is subject to appeal on a question of law. Indeed, it is clear that Earth Force understood this to be the case, having raised the restraint of trade issue in its notice of appeal and written outline of submissions. In these circumstances, I proceed to consider whether the Magistrate was in error in deciding that the condition operates as an unenforceable restraint of trade.
Is the condition unenforceable because it operates as a restraint of trade?
The cases establish the following principles to be applied in considering whether a provision in a contract is an unenforceable restraint of trade:
(1) As a general rule, a provision in a contract which operates in restraint of trade is void on grounds of public policy.[6]
[6]Ibid.
(2) Whether a contractual provision operates in restraint of trade is to be determined at the time the contract is made.[7]
[7]Geraghty v Minter (1979) 142 CLR 177, 188.
(3) In determining whether a provision operates in restraint of trade, the Court looks at the substance of the matter, including the ‘practical working’ of the provision, rather than simply looking at legal form.[8]
[8]Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126, [14].
(4) It is not necessary that the provision at issue directly prohibits trade. It is enough if the provision operates indirectly by way of incentive or pressure to act or refrain from acting in a particular way in restraint of trade.[9] Accordingly, it is enough if the practical operation of the restraint ‘is to tend to deter or restrain the promisee from engaging in trade even though it does not prohibit him from doing so’.[10]
[9]Howard F Hudson Pty Ltd v Ronayne (1972) 126 CLR 449, 453, 468; Stenhouse Australia Ltd v Phillips [1974] AC 391, 402-3.
[10]Ibid.
(5) Relief against restraint of trade is not only available to the parties to the contract at issue. Relief may be obtained by third parties affected by the restraint.[11] Accordingly, in determining whether a particular provision in a contract operates in restraint of trade, its effect upon third parties may be relevant, whether or not those parties are parties to the proceeding in which the issue arises.
(6) Not every restraint of trade is void or unenforceable. It remains open to the party insisting on performance of the provision at issue to justify the restraint as being reasonable.[12] The onus is on the person seeking to rely upon the provision to establish reasonableness.[13]
(7) However, there are some species of restraint which do not, as a general rule, attract the operation of the restraint of trade doctrine. Where that is so, the Court does not consider the question of reasonableness. The categories of restraint which fall within this ‘immune species’ are not closed.[14] This principle is discussed further below.
[11]Buckley v Tutty (1971) 125 CLR 353, 381-2.
[12]Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co [1894] AC 535, 565, per Lord McNaughten.
[13]Amoco Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288, 308.
[14]Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126, [14]-[18].
In Esso Petroleum Co Ltd v Harper’s Garage (Stouroport) Ltd,[15] Lord Wilberforce referred to the general rule expressed by Lord McNaughten in Nordenfelt, and stated that it was subject to the qualification that there are some types of contract which ‘do not enter into the field of restraint of trade at all.’[16] Lord Wilberforce said that it was not possible to state an exhaustive test to define or identify the types of contract which are exempt from the restraint doctrine. However, he referred to the fact that such types of contract ‘may be found to have passed into the accepted and normal currency of commercial or contractual or conveyancing relations’,[17] and thus become ‘accepted as part of the structure of a trading society’.[18]
[15][1968] AC 269.
[16]Ibid, 332.
[17]Ibid, 333.
[18]Ibid, 335.
There is a qualification to this principle of exemption. Lord Wilberforce expressed the qualification in the following terms:
Absolute exemption for restriction or regulation is never obtained: circumstances, social or economic, may have altered, since they obtained acceptance, in such a way as to call for a fresh examination: there may be some exorbitance or special feature in the individual contract which takes it out of the accepted category: but the Court must be persuaded of this before it calls upon the relevant party to justify a contract of this kind.[19]
[19]Ibid, 333. Emphasis added.
Later, in explaining the basis upon which some types of contract are exempt from the restraint doctrine, Lord Wilberforce said:
but I think one can only truly explain them by saying that they have become part of the accepted machinery of a type of transaction which is generally found acceptable and necessary, so that instead of being regarded as restrictive they are accepted as part of the structure of a trading society. If in any individual case one finds a deviation from accepted standards, some greater restriction of an individual’s right to ‘trade’, or some artificial use of an accepted legal technique, it is right that this should be examined in the light of public policy.[20]
[20]Ibid, 335.
Accordingly, even where the provision in question falls within a type to which the restraint of trade doctrine does not normally apply, the Court may nevertheless apply the doctrine if the provision is exorbitant, operates in a way which takes it outside the accepted category, or imposes greater restrictions than that which are generally accepted in commerce for provisions of that kind.
The trading society test expressed by Lord Wilberforce was discussed and approved by Heery J in Australian Capital Territory v Munday as a member of the Full Federal Court (Miles and O’Connor JJ concurring).[21] The correctness of the trading society test was left open in the plurality judgment in Peters.[22] I will follow Heerey J and apply the trading society test as stated and qualified by Lord Wilberforce to the determination of this issue.
[21](2000) 99 FCR 72, [38]-[42], [105].
[22]Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126, [23].
I proceed to apply the relevant legal principles to the facts of this case.
The first issue for determination concerns the practical effect of the condition. It was submitted on behalf of Earth Force that the condition does not operate as a restraint of trade at all, but only as a justifiable deterrent to Negri poaching workers from Earth Force’s labour pool and employing them directly. I do not accept that submission. The introduction fee is sufficiently high in amount to deter Negri from directly employing a worker introduced to it by Earth Force. This is especially so if Negri wishes to directly employ a worker for a short time on a casual basis only. The condition applies to all direct employment, whether full-time, part-time or casual, and regardless of duration.
Next, it is necessary to determine whether the restraint of trade doctrine applies to the condition. It was submitted on behalf of Earth Force that the Magistrate was wrong to ignore this vital step, and proceed directly to consider reasonableness. Earth Force submits that the substance of the condition places it in a class of provisions which are exempt from the restraint of trade doctrine altogether, and that there is accordingly no occasion for the Court to consider whether the condition is reasonable to protect its interests.
This submission was based upon the contention that the condition, in effect, does no more than impose a recruitment fee, and that ‘recruitment fees are part of every day commercial life in Melbourne, in Australia and across the world.’ It was submitted that there is no reported case of a recruitment fee charged by a recruitment or labour hire organisation being struck down as a restraint of trade; and that this indicated that such fees, although indirectly restrictive, were an accepted and necessary part of commercial life.
In further support of this submission, it was contended that, although the Court did not have evidence as to the standard form of recruitment fee provisions contained in recruitment contracts, the Court could be satisfied that the terms of the condition were neither exorbitant nor a significant departure from accepted standards, because Negri would otherwise have the benefit of a ‘free look’ at workers introduced to it by Earth Force and could decide to employ those workers directly without paying Earth Force for that benefit. It was submitted that Earth Force had a legitimate interest to protect its labour pool in this way from poaching by its clients.
I accept that Earth Force has a legitimate interest to protect workers in its labour pool who are placed with employers from poaching in this way. I also accept there is force in the general submission that recruitment fees are routinely charged by recruitment companies for their services in introducing potential employees to employers who subsequently employ them. That is part of ordinary commercial life. It is generally not against public policy to charge a recruitment fee to the employer at the time of employment. However, there was no evidence before the Magistrate as to the standard form of such contractual provisions. In particular, there was no evidence as to the generally accepted range of circumstances giving rise to the obligation on an employer to pay a recruitment fee.
The only evidence before the Magistrate related to the amount of such fees, by reference to a range of standard fees charged by recruitment organisations for introducing employees who are subsequently employed on a full-time basis and remunerated by an annual salary. The evidence disclosed that the introduction fee was set with that range in mind. However, that evidence addressed only one limited aspect of the recruitment industry standard practice. The evidence did not, for example, inform the Court about the range of accepted recruitment fees payable for introducing casual workers who are remunerated on an hourly basis for short periods of time. Nor was there any evidence about the accepted recruitment industry practice where an employee who is introduced does not obtain employment as a direct result of the introduction.
In the absence of evidence, I am not prepared to find that, as a class, all provisions requiring the payment of a recruitment fee are exempt from the operation of the restraint of trade doctrine. However, even if it be accepted that such provisions are generally exempt, the lack of evidence does not prevent the Court from reaching a firm view that the condition in this case may operate exorbitantly in amount or extent. This is because the introduction fee is payable ‘regardless of the circumstances or conditions’ by which Negri employs a worker who is introduced to it by Earth Force. Accordingly, the condition expressly states that no causal link between the introduction and the subsequent direct employment is required. The following matters demonstrate how such a provision may operate exorbitantly.
First, the condition contains no time limitation. The introduction fee is payable whenever Negri employs a worker introduced to it by Earth Force. For example, a worker introduced by Earth Force could have ceased working for Negri during 2008 and, in the year 2018, be employed by Negri directly. By that time, the introduction is highly unlikely to be a contributing factor to the direct employment.
Secondly, the condition contains no limitation upon the capacity in which the worker is employed. For example, in addition to a lengthy time lapse as discussed above, the worker may have changed or increased his or her skills prior to direct employment by Negri. Take an employee like Mr Lancaster, who is employed as an operator of heavy machinery. However, following that employment he could gain industry experience and qualify to act as a foreman. If he subsequently answered an advertisement by Negri, and is directly employed by Negri in that capacity, the condition has the effect that the introduction fee is payable; notwithstanding that the introduction had nothing to do with his employment as a foreman.
Thirdly, the condition imposes no limitation upon the length of direct engagement by Negri of a worker who is introduced by Earth Force. For example, if the worker accepted direct employment from Negri on a part-time or casual basis, the full introduction fee would be payable. As appears above, the introduction fee was set by reference to a range of recruitment fees for employees who obtain full-time employment and are remunerated by an annual salary.
Accordingly, the restraint of trade doctrine applies to the condition, and the onus lay upon Earth Force to establish its reasonableness. For the above reasons, it could not do so. The condition is therefore void.
Conclusion and orders
The Magistrate erred in finding that the condition imposed an unenforceable penalty upon Negri. However, the condition is nevertheless void because it operates in restraint of trade in an unreasonable manner. The Magistrate’s decision is supported on that ground. The appeal will be dismissed. I will hear the parties as to costs.
2
4
0