GKR Karate Australia P/L v P & M Thomas P/L & Ors No. Scgrg-00-321

GKR KARATE AUSTRALIA PTY LTD (Plaintiff) and
P & M THOMAS PTY LTD (First Defendant),
PAUL RONALD THOMAS (Second Defendant),
MICHELLE THOMAS (Third Defendant) and

ADRIAN FRANCIS SCLANDERS (Fourth Defendant)

[2000] SASC 122

MARTIN J. The plaintiff (“GKR”) operates businesses conducting karate classes throughout Australia and in a number of overseas countries. The fourth defendant (“Mr Sclanders”) has been associated with GKR for a number of years. That association has ended.
On 5 April 2000 I made a number of orders on the application of GKR which had the effect of restraining Mr Sclanders from entering into competition with GKR in the business of conducting karate classes. Subsequently GKR filed a statement of claim against all defendants seeking damages pursuant to a number of heads of claim.
On 27 April 2000, in effect the plaintiff sought orders that would have restrained Mr Sclanders for a period of twelve months from entering into competition with GKR in the metropolitan and outer-metropolitan areas of the capital cities of every State as well as Canberra, the Gold Coast, the Sunshine Coast, Newcastle, Central Coast (New South Wales), Wollongong, Geelong and Ballarat. When the hearing resumed on 2 May 2000, however, the plaintiff no longer sought an express order preventing Mr Sclanders from entering into competition with GKR, but sought a number of orders which would impose severe constraints upon the capacity of Mr Sclanders to commence and operate a business in competition with GKR. The orders now sought are as follows:
“1..... That the Fourth Defendant (whether by himself or by his servants or agents or any of them or otherwise howsoever and including by Kenshukai Australia Pty Ltd) be restrained from doing the following acts or any of them, namely using or disclosing GKR’s Information (as more particularly defined in paragraph 14 of the Statement of Claim filed herein) and any other confidential information of the Plaintiff relating to its business of conducting karate classes in Australia and in particular South Australia.
2.[Not applicable]
3...... That the Fourth Defendant (whether by himself or by his servants or agents or any of them or otherwise howsoever and including by Kenshukai Australia Pty Ltd) be restrained from conspiring to injure the Plaintiff and in particular, but without limiting the generality thereof from:
3.1... soliciting or procuring any person or entity presently in a contractual relationship with the Plaintiff including karate instructors, members of the Plaintiff and owners or occupiers of premises or facilities from which the Plaintiff has been conducting karate classes from concluding or determining such contractual relationship;
3.2 soliciting or procuring (whether by himself or by his servants or agents or any of them or otherwise howsoever and including by Kenshukai Australia Pty Ltd) whether directly or indirectly by any means, any person or entity who was from 25 October 1999 and thereafter in a contractual relationship with the Plaintiff including karate instructors, members of the Plaintiff and owners or occupiers of premises or facilities from which the Plaintiff has been conducting karate classes from entering into any contractual relationship or making arrangements with the Fourth Defendant or with Kenshukai Australia Pty Ltd or any other entity associated with the Fourth Defendant;
3.3... soliciting or procuring any person or entity presently contracted with GKR Karate UK Limited (including but not limited to UK Zone Directors or Regional Managers) to enter into any contractual relationship or making arrangements with the Fourth Defendant or with Kenshukai Australia Pty Ltd or any entity associated with the Fourth Defendant;
3.4 soliciting or procuring any person or entity who was from 25 October 1999 and thereafter in a contractual relationship with GKR Karate UK Limited (including but not limited to former UK Zone Directors or Regional Managers) to enter into any contractual relationship or making arrangements with the Fourth Defendant or with Kenshukai Australia Pty Ltd or any entity associated with the Fourth Defendant;
3.5... planning the destruction of the Plaintiff’s business.
4...... That the Fourth Defendant (whether by himself, his servants, agents or otherwise and including by Kenshukai Australia Pty Ltd) be restrained from inducing or procuring breaches of or unlawfully interfering in contracts between the Plaintiff and any Regional Manager of the Plaintiff or of GKR Karate (UK) Limited, any karate instructor and any independent distributor engaged by the Plaintiff and any owner or occupier of premises or facilities from which the Plaintiff has been conducting karate classes.
5.That the Fourth Defendant (whether by himself, his servants or agents or otherwise and including by Kenshukai Australia Pty Ltd) [be restrained] from publishing or further publishing or causing to be published any words to the effect that the Plaintiff is or may be unable to continue to provide karate classes in an appropriate way or in any way similarly disparaging the Plaintiff or its business.”
Mr Sclanders accepts that if he is permitted to commence a business in competition with GKR, he will not be entitled to breach the fiduciary duties that, as a former director of GKR, he owes to GKR. He accepts that he cannot “plan the destruction” of GKR’s business (par 3.5) and does not oppose the order sought in paragraph 5. However, counsel submitted that GKR was seeking to restrain the use of information that is not “confidential” and was proposing unreasonable restraints on lawful competition.
Some of the factual background between the parties is set out in ex tempore remarks I delivered on 9 March 2000 in Action No. 210 of 2000. Those proceedings were instituted before the action now under consideration. Mr Sclanders is a plaintiff together with his wife and a company of which they are the sole shareholders, Goldwell International Pty Ltd (“Goldwell”). That company is the trustee of the Goldwell Investment Trust, a family discretionary trust controlled by Mr and Mrs Sclanders. On 1 December 1995, Mr and Mrs Sclanders and Goldwell entered into a business development agreement with GKR and Mr and Mrs Sullivan, the sole shareholders of GKR. Mr Sclanders became the managing director of GKR’s operations in Australia and overseas and a director of GKR’s overseas entities. Mr Sclanders claims that GKR and Mr and Mrs Sullivan are planning to deprive him of his entitlements pursuant to the business development agreement. Mr Sclanders sought restraining orders and access to certain documents. A number of hearings were conducted. The evidence suggests that while those proceedings were continuing, Mr Sclanders and other defendants in this action took steps to set up businesses in competition with GKR in South Australia and the United Kingdom. In affidavit evidence filed by GKR to which Mr Sclanders has not responded, a basis is found for a prima facie conclusion that the second defendant, pursuant to an arrangement with Mr Sclanders, behaved in an inappropriate manner when attempting to set up the competing business in the southern suburbs of Adelaide. It was that conduct which led to the orders made on 5 April 2000.
The statement of claim filed by GKR in the current matter asserts that Mr Sclanders resigned as managing director and director of GKR on about 26 October 1999 and as a director of the GKR overseas entities on about 4 November 1999. Paragraph 11 of the statement of claim is in the following terms:
“After 25 October 1999, Sclanders was, by his company Goldwell International Pty Ltd, retained by GKR to perform senior management duties and services as Operations Manager and was responsible for GKR’s and its associated overseas entities’ operational management throughout Australia, New Zealand, United States of America and the United Kingdom (“the Retainer”).”
The statement of claim then alleges that Mr Sclanders was paid by GKR the sum of $6 210 per week “by payment directed by Sclanders to Goldwell in consideration for the Retainer”. It is alleged that the retainer was terminated by GKR on 16 March 2000.
By paragraph 15 of the statement of claim, GKR asserts that a number of terms were, by implication, incorporated into the Retainer including terms that Mr Sclanders owed a duty of confidentiality to GKR. As a consequence it is asserted that Mr Sclanders owed a duty to forever preserve the confidence of GKR’s information and not to use that information for his own purposes. A number of other duties are said to have been created by virtue of the implied terms. Counsel for Mr Sclanders submitted, however, that no contractual relationship existed between Mr Sclanders and GKR in respect of which any terms could be implied. He submitted that the contractual relationship identified in the statement of claim as the “Retainer” was between GKR and Goldwell.
The primary evidence of the contractual relationship forming the basis of the Retainer is a letter of 17 February 2000, written on GKR letterhead and signed by Mr Sullivan as the Managing Director of GKR. It was addressed to
“Mr A Sclanders
Goldwell International Pty Ltd”.
The letter confirmed that Goldwell had been retained to provide operational management services to GKR pursuant to a verbal contract whereby “your company is paid weekly in respect of such services”. The letter also confirmed that Mr Sclanders had resigned his directorship of GKR and its international associated entities and that he was no longer performing any duties associated with the directorship or the role of general manager of GKR. The letter added that it was an implied term of Goldwell’s contract for services that it would provide services in good faith and would “otherwise recognise a duty of fidelity to GKR”. The letter then asserted that Mr Sclanders had made certain approaches and carried out certain activities which constituted a repudiation of the contract by Goldwell. GKR did not by the letter purport to terminate the contract, but indicated that it proposed to suspend or otherwise waive the requirement that Goldwell perform any services to GKR for a short time pending a further investigation.
Counsel for GKR referred to the affidavit of Mr David Loeser, the current National Administration Manager of GKR, in which he states that after the resignation of Mr Sclanders as Managing Director in October 1999, Mr Sclanders continued to perform the same duties, albeit as Operations Manager. Counsel also highlighted the apparent practice of GKR when retaining corporate entities to perform administrative services of having the manager of the entity specifically agree to be bound by duties of confidentiality and to guarantee the performance of the agreement by the entity. No such documentation exists with respect to the contractual arrangements that formed the basis of the Retainer.
In my opinion, GKR is likely to have considerable difficulty in establishing any contractual arrangements between GKR and Mr Sclanders in connection with the Retainer. However, GKR also submitted that certain equitable duties would have arisen. In addition, counsel for GKR referred to evidence that, while Mr Sclanders was Managing Director of GKR, he undertook the responsibility of ensuring that all senior personnel or service providers contracted to GKR executed confidentiality agreements. However, Mr Sclanders did not execute such an agreement. Mr Sclanders, his brother and Mr Sullivan were the only persons who did not execute agreements containing terms concerning confidentiality.
Notwithstanding my reservations, for present purposes I am prepared to assume that there is a serious question to be tried in connection with the extent of the duties owed by Mr Sclanders to GKR concerning the use of confidential information (Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 per Mason ACJ at 153).
Another important issue argued before me was the question as to what information can properly be described as confidential so as to justify an order prohibiting Mr Sclanders from making use of such information. GKR identified the information as that set out in paragraph 14.1 of the statement of claim which is as follows:
“14.1......... During the course of his association with GKR, Sclanders acquired access to information and documentation relating to GKR and its operations, including but not limited to:
.Intellectual property arising out of or resulting from GKR’s recruitment and instruction of karate;
.................. GKR’s promotional materials;
.GKR’s legal and contractual documentation:
.................. GKR’s marketing or canvassing methodologies;
.GKR’s business and marketing plans and projections;
.................. GKR’s operational practices and policies and procedures;
.GKR’s financial information, budgets and reports;
.................. GKR’s strategies and strategic plans;
.particulars of arrangements and/or agreements between GKR and third parties;
.................. GKR’s records including lists or collations and information appertaining to members, students, instructors and sensais (senior instructors), venues of operation, contractors, suppliers (hereinafter collectively referred to as “GKR’s Information”).”
Counsel for Mr Sclanders argued that much of what is claimed in paragraph 14.1 cannot properly be described as confidential for present purposes. He also argued that GKR should not succeed on the current application because the description of the confidential information is too general and vague to justify the orders sought. While maintaining that orders restraining Mr Sclanders from directly and deliberately approaching known clients or instructors and other persons known to be involved with the businesses of GKR were not justified in law, counsel for Mr Sclanders said he took a pragmatic approach in view of the history of the matter and would present no submissions in opposition to such orders. However, Mr Sclanders maintained that he should be free to canvass for clients by doorknocking and to canvass existing or past clients of GKR if they are encountered accidentally during doorknocking. Similarly, he should be free to accept persons who respond to advertisements whether as clients or instructors or in some other capacity.
Identification of the material that should properly be the subject of a restraining order is difficult. In addition, in respect of some of the items set out in paragraph 14.1, it is not easy to discern why it would be a breach of duty for the plaintiff to use knowledge and expertise gained during the course of his time with GKR or why, in the context of the principles governing springboard injunctions, Mr Sclanders would be given an unfair advantage if he was permitted to use such knowledge and expertise. For example, taken literally the expressions in paragraph 14.1 “GKR’s marketing or canvassing methodologies” and “GKR’s operational practices and policies and procedures”, when combined with the order sought in paragraph 1, would include almost all expertise gained and all methods learned while with GKR. Thus, if a potential client responded to an advertisement, according to the case for GKR Mr Sclanders would not be able to employ any of the sales techniques that are used by GKR or that he has learnt during his time with GKR.
Mr Sclanders wishes to canvass for clients by doorknocking, but if GKR was successful in its current application he would not be permitted to do so. In support of its case for such a restraint, GKR filed an affidavit of Mr Gavin Samin, the Zone Director of GKR for a number of States and New Zealand. The affidavit explains that GKR sells memberships to potential students through “independent distributors” who are recruited by means of advertisements in the public press such as The Advertiser and Messenger Newspapers in Adelaide. Applicants are interviewed according to a scripted formula so that each interview is as uniform as possible. The successful applicants are given promotional material and are trained by a Regional Manager or a Team Coordinator who are experienced distributors. The training involves the new distributor learning a “canvassing script”. A copy of such a script was annexed to the affidavit. A brief explanation is then given as to the operations of the distributors in their doorknocking activities and of the material given to new students.
I was referred to a number of authorities concerning the principles by which a court should determine what information is “confidential” for present purposes. It is unnecessary for me to canvass those authorities. In my opinion, the methodology used to train distributors and sales or canvassing techniques used by those distributors cannot realistically be described as a trade secret or information akin to a trade secret, even adopting the broadest possible view of the type of information encompassed within that description. Such methodology and techniques are commonly in use and can reasonably be said to be in the public domain. The promotional material given to new students lacks any secrecy or confidentiality by reason of its publication, although questions as to intellectual property of designs may arise.
If GKR succeeded entirely with respect to the orders it seeks, in effect Mr Sclanders would be prevented from attempting to set up a business in competition with GKR. He would be unable to use any expertise or knowledge gained during his time with GKR. In my opinion, such a restraint on lawful competition cannot be justified. While the rights and obligations of the parties are litigated, I am required to endeavour to achieve a just balance between protecting the interests of GKR which should not be unfairly or improperly damaged and the interests of Mr Sclanders who should not unduly or unnecessarily be restricted in his endeavours to conduct lawful competition. I also bear in mind that any orders of restraint may have an impact upon other persons.
In Castlemaine Tooheys, Mason ACJ also referred to the need for the plaintiff to demonstrate that it will suffer irreparable injury for which damages will not be an adequate compensation unless the orders sought are granted. Counsel for GKR pointed out that, on the basis that Mr Sclanders is to be allowed to establish a business in competition with GKR, if appropriate restraints are not granted and GKR ultimately succeeds, it will be almost impossible to assess the damages that have been caused because of the absence of the constraints that should have been imposed at this time. The same difficulty exists from the point of view of Mr Sclanders. If constraints are imposed which it is ultimately found should not have been imposed, there is no starting point from which to assess the damage caused to the new business operated by Mr Sclanders by reason of the inappropriate constraints.
As to the balance of convenience, Mr Sclanders has filed an affidavit in which he states that unless he is able to commence a business in competition with GKR he will be unable to earn sufficient income to support his wife and four young children. He is the sole financial provider for his family. He has not received any income from the plaintiff since mid March 2000. His only other source of income is approximately $1 000 per month net for agisting horses on a property in which he and his family reside and which is owned by a discretionary trust of which he is an object. That property has been sold and the net proceeds due from settlement in mid May 2000 will be used by him toward partial payment of the price of a new home that the family has purchased. Mr Sclanders “owns” a property at Kersbrook valued at approximately $300 000 in respect of which there is a debt to a mortgagee of approximately $230 000. A number of shares are also owned. Mr Sclanders is 42 years of age and has been involved in the karate business for approximately 13 years. Prior to that he had a variety of labouring jobs. He left school in Year 10 and has no formal qualifications.

The point was made by the Court of Appeal in Roger Bullivant Ltd & Ors v Ellis & Ors [1987] 13 FSR 172 at 183 that “the law does not restrain lawful competition” and “that in restraining unlawful competition it seeks to protect the injured and not to punish the guilty...”. I must also bear in mind, however, that to the extent that Mr Sclanders may have made deliberate and unlawful use of any of the plaintiff’s property, “he cannot complain if he finds that the eye of the law is unable to distinguish between those whom he could, had he chose, have contacted lawfully and those whom he could not” (p 181).
Mr Sclanders fulfilled the role of Chief Executive Officer and Operations Manager until October, 1999. Once the retainer had been put in place, he continued to perform the duties of Operations Manager. Mr Sclanders’ duties encompassed the whole of Australia and it is unlikely that he has committed to memory the names of any significant numbers of clients or venues used by GKR throughout Australia. It is also reasonable to assume that he had an intimate knowledge of the senior personnel and would have a good memory of those persons. It is unlikely, however, that he would now recall the names of significant numbers of instructors or other persons who were not in major management positions. From the evidence of Mr Sclanders, it appears that the primary records concerning instructors, distributors and clients are kept by the regional managers and zone directors. Mr Sclanders does not have access to any of those records and made no submissions in opposition to a suggestion that he should not be entitled to obtain such records from regional managers or zone directors. As to financial information, Mr Sclanders received regular reports, but he destroyed them soon after he read them.
There is evidence in these proceedings that during March and April 2000 the second defendant, with the knowledge of Mr Sclanders and as part of an enterprise commenced with Mr Sclanders, contacted the operators of a number of venues used by GKR for karate classes in a GKR area of operation called Region 23. The second defendant had managed Region 23 while employed by GKR. In essence, it is said that the second defendant attempted to take over the classes of GKR at those venues and to commence a business in competition with GKR at those venues teaching what was called “Kenshukai Karate”. In these circumstances, Mr Sclanders should not be entitled to take advantage of that inappropriate conduct by using the venues in Region 23 identified in paragraph 8 of the affidavit of David Loeser sworn on 5 April 2000.
In the exercise of my discretion, I have decided to impose a number of constraints upon any attempt by Mr Sclanders to set up a business in competition with GKR. In general terms, I will order that Mr Sclanders and any person or entity associated with him shall not:
(i).... conspire to injure GKR or plan the destruction of GKR’s business (excluding by way of lawful competition).
(ii)    publish or cause to be published any information to the effect that GKR is or may be unable to continue to provide karate classes in an appropriate way or in any way similarly disparage GKR or its business.
(iii).. enter into any contractual relationship or arrangement with any person or entity who was or is in a contractual relationship with GKR or an overseas GKR entity as Regional Manager, Zone Director or in another capacity for the use of the services of such person or entity in connection with any business in competition with GKR in circumstances that would amount to a breach by such person or entity of an express term or terms of a written agreement that exists or has existed between such person or entity and GKR or an overseas GKR entity.
(iv)   directly or indirectly attempt to obtain from any person or entity who was from 25 October 1999 and thereafter in a contractual relationship with GKR as Regional Manager or Zone Director information as to the identity and addresses of persons or entities who were from 25 October 1999 and thereafter clients of GKR or engaged by GKR as distributors or karate instructors.
(v).... directly or indirectly attempt to obtain from any person or entity who was from 25 October 1999 and thereafter in a contractual relationship with GKR as Regional Manager or Zone Director information as to the venues used by GKR within Australia for the conducting of karate classes from 25 October 1999 and thereafter.
(vi)   enter into any arrangement for the use of buildings or other facilities in the conduct of a business in competition with GKR at any of the following localities:
Aberfoyle Park PS Campus
Aberfoyle Hub School
Henley Sailing Club
Hackham West Primary School
Hallett Cove East Primary School
Concordia College
Reynella East High School
Reynella East Primary School
......... Darlington Primary School
Sheidow Park Primary School
Hallett Cove Primary School R-12
Christies Beach High School
Moana Progress Hall
Morphett Vale East Primary School
Seaview High School
(vii). solicit or procure, other than by way of public advertising, the services of any person or entity engaged by GKR at the date of this order as a distributor or instructor in connection with any business in competition with GKR; provided that this order shall not restrain the soliciting or procuring of the services of such a GKR distributor or instructor who responds to a public advertisement.
(viii) solicit or procure any person or entity who is a client of GKR at the date of this order to become a client of a business in competition with GKR; provided that this order shall not restrain the soliciting or procuring of such a person or entity to become a client where such person or entity responds to a public advertisement or is contacted in the course of canvassing for clients by means of general doorknocking in the street or area in which the contact is made by that means.
I have expressed my decision in terms of restraints related to specific topics because, in my opinion, the use of general expressions such as “GKR’s confidential information” or “GKR’s intellectual property” are too vague and open to subsequent dispute. The parties should be able to proceed with a reasonable degree of certainty as to their rights. The general intention of my orders will be to restrain Mr Sclanders from obtaining identified information in the possession of Regional Managers or Zone Directors and to prevent “deliberate” personal approaches to persons known by Mr Sclanders and his associates to be existing clients of GKR or persons who are currently engaged by GKR as distributors or instructors. However, in my opinion it is inappropriate to deny Mr Sclanders the opportunity to recruit such persons provided that either those persons respond to public advertisements or, in the case of clients, initial contact is made “accidentally” during the course of general doorknocking.
As to the period during which the constraints should remain in operation, counsel for GKR suggested that they should operate until the resolution of GKR’s claim either by way of settlement or court order after a trial. In my opinion, however, there is a real danger that the constraints could exist for an unreasonable period of time. On one view, such an order could be made leaving it to Mr Sclanders to seek a review of the order after a reasonable period has elapsed. The alternative view is that GKR should justify such an order and, in the absence of appropriate justification, the court should fix what it now considers to be a reasonable period during which the constraints should operate. I favour the latter course. In my opinion, the constraints that I have identified should remain in operation for a period of nine months.
I will hear the parties further as to the final terminology of the orders.

[2000] SASC 122

11 May 2000