Habitat 1 Pty Ltd v Formby [No 2] - [2017] WASC 331

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: HABITAT 1 PTY LTD -v- FORMBY [No 2] [2017] WASC 331

CORAM: BANKS-SMITH J

HEARD: 1 - 3 FEBRUARY 2017 & ON PAPERS FILED 9 & 13 FEBRUARY & 3, 9 & 16 MARCH 2017

DELIVERED : 17 NOVEMBER 2017

FILE NO/S: CIV 2907 of 2016

BETWEEN: HABITAT 1 PTY LTD
First Plaintiff
MALIZA NOMINEES PTY LTD in its capacity as Trustee of THE PRITCHARD FAMILY TRUST
Second Plaintiff
AND
CHRISTIAN MATTHEW FORMBY
First Defendant
CHRISTIAN MATTHEW FORMBY & CHANTELLE FORMBY as Trustees for THE FORMBY FAMILY TRUST
Second Defendants
(BY ORIGINAL ACTION)
CHRISTIAN MATTHEW FORMBY
First Plaintiff by Counterclaim
CHRISTIAN MATTHEW FORMBY & CHANTELLE FORMBY as Trustees for THE FORMBY FAMILY TRUST
Second Plaintiffs by Counterclaim
AND
GEOFFREY THOMAS PRITCHARD
Defendant by Counterclaim
(BY COUNTERCLAIM)

Catchwords:

Contract - Contract of employment - Where employee managing director and shareholder of first plaintiff - Restraint of trade - Where second plaintiff acquired interest in first plaintiff on terms including restraint covenants - Whether legitimate interest of employer in protecting information - Enforceability of restraint covenants - Cascading clause - Whether severance permissible in cascading clause - Whether restraint covenants breached

Contract - Payments to shareholders - Whether payments dividends or loans - Whether shareholders and directors bound by loan terms in first plaintiff's Constitution - Whether loans in default

Termination of employment - Whether summary dismissal justified - Whether termination for gross misconduct without notice justified - Whether terms of employment varied - Whether employee entitled to adjusted payout

Legislation:

Nil

Result:

Judgment to be entered for the plaintiffs
Counterclaim allowed in part

Category: A

Representation:

Original Action

Counsel:

First Plaintiff               :        Ms W F Gillan
Second Plaintiff               :        Ms W F Gillan
First Defendant               :        Mr C S Gough
Second Defendants               :        Mr C S Gough

Solicitors:

First Plaintiff               :        Tottle Partners
Second Plaintiff               :        Tottle Partners
First Defendant               :        Mills Oakley Lawyers
Second Defendants               :        Mills Oakley Lawyers

Counterclaim

Counsel:

First Plaintiff by Counterclaim     :        Mr C S Gough
Second Plaintiffs by Counterclaim :        Mr C S Gough
Defendant by Counterclaim         :        Ms W F Gillan

Solicitors:

First Plaintiff by Counterclaim     :        Mills Oakley Lawyers
Second Plaintiffs by Counterclaim :        Mills Oakley Lawyers
Defendant by Counterclaim         :        Tottle Partners

Case(s) referred to in judgment(s):

AGA Assistance Australia Pty Ltd v Tokody [2012] QSC 176
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288
Attwood v Lamont [1920] 3 KB 571
BDO Group Holdings (Qld) Ltd v Sully [2015] QSC 166
BDO Group Investments (NSW‑Vic) Pty Ltd v Ngo [2010] VSC 206
Bridge v Deacons (a firm) [1984] 1 AC 705
British Reinforced Concrete Engineering Company Ltd v Schelff [1921] 2 Ch 563
Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; (2006) 71 NSWLR 9
Callaughan v Icognition Pty Ltd [2013] ACTCA 2
Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5
Concut Pty Ltd v Worrell [2000] HCA 64
DP World Sydney Ltd v Guy [2016] NSWSC 1072
Emeco International Pty Ltd v O'Shea [No 2] [2012] WASC 348
Fitwear v Pietrolungo [1991] VicSC 476 (12 September 1991)
Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420
Goldsoll v Goldman [1915] 1 Ch 292
Habitat 1 Pty Ltd v Formby [2016] WASC 376
Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267
Herbert Morris Ltd v Saxelby [1916] 1 AC 688
Heugh v Central Petroleum Ltd [No 5] [2014] WASC 311
HRX Holdings Pty Ltd v Pearson [2012] FCA 161
Hydron Pty Ltd v Harous [2005] SASC 176
Icognition Pty Ltd v Peter James Callaughan [2012] ACTSC 19
IF Asia Pacific Pty Ltd v Galbally [2003] VSC 192
JQAT Pty Ltd v Storm [1987] 2 Qd R 162
Landmark Underwriting Agency Pty Ltd v Kilborn [2006] NSWSC 1108
Lindner v Murdock's Garage [1950] HCA 48; (1950) 83 CLR 628
Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505
Lyreco Pty Ltd v Schoolworks Australia Pty Ltd [2006] NSWSC 1184
M & S Drapers v Reynolds [1956] 3 All ER 814
Mason v Provident Clothing & Supply Company Ltd [1913] AC 724
Miles v Genesys Wealth Advisers Ltd [2009] NSWCA 25
Mills v Dunham [1891] 1 Ch 576
Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723
Nomad Modular Building Pty Ltd v Smith [2007] WASC 117
Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111
Pryse v Clark [2017] NSWSC 185
Sear v Invocare Australia Pty Ltd [2007] WASC 30
Seven Network (Operations) Ltd v Warburton (No 2) [2011] NSWSC 386
Shepherd v Felt and Textiles of Australia Ltd [1931] HCA 21; (1931) 45 CLR 359
Siver Pty Ltd v Bunce (Unreported, WASC, Library No 8086, 23 February 1990)
Smith v Nomad Modular Building Pty Ltd [2007] WASCA 169
SST Consulting Services Pty Ltd v Rieson [2006] HCA 31; (2006) 225 CLR 516
Stenhouse Australia Ltd v Phillips [1974] AC 391; [1973] 2 NSWLR 691
Synavant Australia Pty Ltd v Harris [2001] FCA 1517
Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations [2014] WASCA 164; (2014) 48 WAR 261
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165
Vision Eye Institute Ltd v Kitchen [2014] QSC 260
Young v Queensland Trustee [1956] HCA 51; (1956) 99 CLR 560

TABLE OF CONTENTS

Background to proceedings

Witnesses
Issues for determination
PART A

Restraint of trade
The ESA restraint clause
Other relevant ESA clauses
The Shareholders Deed restraint clause
Overarching principles relevant to restraints of trade
The nature of Habitat's business at the time of the ESA
The nature of Habitat's business more generally and after execution of the ESA
Mr Formby's role in Habitat
The negotiation of the restraint clauses
Preliminary - some matters to be taken into account in assessing reasonableness
Habitat has legitimate business interest to be protected
Justification for covenant not to compete
Habitat's confidential information
Customer connections
Is the extent of the non-compete restraint reasonable
Universal restraint
Cascading clauses - general
Geographic area
Severance in cascading clauses
Time restraint
Is non-solicitation restraint justified
Is non-interference restraint justified
Pryse v Clark

Restraint clause: Shareholders Deed
Breach of restraint covenants - ESA

Breach by conduct relating to Hawk Crest (non-compete)
Breach by establishing Habitat Interiors (non-compete)
Breach by soliciting customers
Breach by interference

Breach of restraint covenants - Shareholders Deed
PART B

Whether payments to second defendants loans or dividends
The distributions – summary of Habitat's position
The distributions - summary of Mr and Ms Formby's position
Documenting the loan accounts
Early arrangements
Change to salary plus payments debited to loan accounts
Declaration of dividend ahead of sale of shares to Maliza
After the ESA - the interim dividend on the share transfer
Company records
Other references in documents to loans/distributions/dividends
Evidence at trial
Determination - distributions are loans

Insurance
Personal expenses

The terms of the loans
Calling up loan
Loans for personal expenses
Alternative arguments
PART C
Mr Formby's counterclaim for payment of salary and superannuation

Underpayment to 15 April 2015
The alleged salary variation effective April 2015
Habitat's position on variation
Mr Formby's position on variation
Determination - salary was varied

The circumstances of termination

Termination provisions in ESA
Summary dismissal

Termination without notice

Westpac
GMO Valuation
NXT Enterprises
Communications Formby to Westpac and Formby to Bird
The construction of cl 19.2 ESA

Dismissal on notice for gross misconduct

Relevance of definition - no notice
Grounds - Gross Misconduct

Invoice for architecture
Activities for Hawk Crest
Excessive annual leave
Comments to Mr Hodge
Deleting 'his' emails from Habitat records

Objections

Conclusion

BANKS-SMITH J:

Background to proceedings

The first plaintiff (Habitat) specialises in the design and construction of commercial and office fitouts.
The first defendant (Mr Formby) was a founding director of Habitat. His family trust held 50% of the issued shares in Habitat. He was also at all material times the sole company secretary.
In February 2013, Geoffrey Pritchard through the second plaintiff (Maliza) acquired the balance 50% shareholding in Habitat from a third party. Mr Pritchard also became a director.
Mr Formby was employed as the managing director pursuant to the terms of an Executive Services Agreement (ESA) made between him and Habitat on 22 February 2013.[1] The terms of the ESA include a restraint of trade clause.
[1] TB 41.
In February 2016, Mr Formby left Habitat. He says he resigned. Habitat says that it dismissed Mr Formby from his employment, either summarily or for gross misconduct. Habitat alleges that following his departure from Habitat, Mr Formby breached the contractual restraints, in particular by undertaking work that competes with Habitat.
The relationship between Mr Formby and Mr Pritchard has irreparably broken down.
In November 2016, I granted an injunction to enforce certain aspects of the restraints pending further order.[2] Following the trial, the first priority was to focus on the time period of any restraint. I determined that assuming the restraint provisions were enforceable, a time period of 12 months would provide sufficient protection of the interests of Habitat. Therefore, on 20 March 2017 I ordered that the injunction be discharged.
[2] Habitat 1 Pty Ltd v Formby [2016] WASC 376.
These proceedings between the parties are not limited to allegations as to the restraints. Habitat claims the second defendants are obliged to repay certain loans made to them as shareholders. The second defendants are Mr Formby and his former wife, Chantelle Formby, as trustees of the Formby Family Trust.
Mr Formby claims (by counterclaim) that he was underpaid employment entitlements by Habitat under the ESA and seeks payment. The level of any payment depends upon the circumstances of his resignation or dismissal.
The second defendants also bring a counterclaim alleging their shares in Habitat were wrongly 'converted' after Mr Formby's employment terminated.
Attempts to agree segregation of some of those other matters to facilitate a determination of the restraint issues were only successful in part. Parts deferred are:
(a)the quantification of any damage, assuming the restraints are found to be valid and Mr Formby breached those restraints;
(b)the counterclaim dealing with the transfer of shares.

Witnesses

Mr Pritchard gave evidence. Mr Pritchard is a chartered accountant. He practised in the areas of tax and insolvency before moving out of accounting some 25 years ago and into chief executive roles, corporate governance and private equity mergers and acquisitions.
The plaintiff also called Elizabeth Bradford and Glenn Bergsma.
Ms Bradford is a chartered accountant with over 15 years experience as a financial controller. She was employed by Habitat as its financial controller since 2011. After Mr Pritchard joined Habitat, she attended by invitation almost all board meetings, and prepared board papers and minutes. She kept Habitat's accounts.
Mr Bergsma provided consulting services to Habitat from about 2014. He provided management consultancy and organisational developments services. He attended most board meetings. Mr Bergsma did not have any decision making power within Habitat. Later in 2014, Mr Pritchard and Mr Bergsma became business partners in a separate venture.
Mr Formby gave evidence. His qualifications and experience are dealt with below. Ms Formby gave limited evidence. She is a retail assistant and gave evidence as to her role as joint trustee of the Formby Family trust.

Issues for determination

The issues that fall to be determined can be grouped as follows:
(a)are the restraints enforceable and to what extent?
(b)if the restraints are enforceable, has Mr Formby breached them?
(c)were payments that were made by Habitat to the second defendants made by way of dividends or loans?
(d)if the payments were loans, what are the terms of the loans?
(e)to the extent Habitat made other miscellaneous payments on behalf of Mr Formby, are they repayable?
(f)is Mr Formby entitled to be paid any further entitlements by Habitat on the basis that he resigned, that he was dismissed summarily or that he was dismissed for gross misconduct?
These reasons deal with the issues in that order, divided into Part A (restraint issues), Part B (loan issues) and Part C (employee entitlement issues).

PART A

Restraint of trade

Habitat was incorporated in 2005. Mr Formby was a founding director, secretary and shareholder (as trustee) of Habitat. He remained a director, secretary and shareholder (as trustee) as at February 2013.
Mr Formby founded Habitat with Milos Stojsavljevic. Mr Stojsavljevic was the director of a company called Little Rhino (WA) Pty Ltd (Little Rhino) which was the trustee of the Stojsavljevic Family Trust.
Prior to February 2013, the two hundred issued shares in Habitat were held as to 50% by Mr Formby and Ms Formby as trustees of the Formby Family Trust[3] and as to 50% by Little Rhino. In around 2011, Mr Stojsavljevic became ill and wished to sell his interest in Habitat.[4] Habitat had previously undertaken a fitout for Mr Pritchard, and Mr Formby had also met Mr Pritchard from time to time as Mr Pritchard had offered to provide him with financial planning advice.[5]
[3] Before Mr and Ms Formby became trustees of the family trust, the trustee was a company controlled by Mr Formby called FBY Global Pty Ltd which is named in certain documents. No issue was identified as arising out of the change in identity of the trustee(s).
[4] Exhibit 10 [45].
[5] Exhibit 10 [39], [49]. In 2010, Mr Pritchard, in his capacity as CEO of an entity known as Finovia, had retained Habitat to design a fitout: Exhibit 10 [35].
In 2012, Mr Pritchard and Mr Formby had various communications as to Mr Pritchard acquiring Mr Stojsavljevic's interests. Those communications refer to the need for restraints (these are addressed in more detail below).
On or about 22 February 2013, Maliza as trustee of the Pritchard Family Trust, acquired the 50% shareholding from Little Rhino for a consideration of $1 million. The share sale was documented by way of a Share Sale Agreement executed on or about 22 February 2013 between Habitat, Maliza, Little Rhino and Mr Stojsavljevic.[6] Mr Formby executed the Share Sale Agreement as director of Habitat.
[6] TB 40.
Importantly, there were conditions precedent to the Share Sale Agreement that:[7]
(a)Mr Formby and Habitat enter into an employment agreement on agreeable terms;
(b)Mr and Ms Formby (as continuing shareholders) and Maliza enter into a shareholders' agreement on mutually agreeable terms;
(c)Habitat declares a dividend and offsets the dividend payment against existing loan amounts owed by Little Rhino and Mr and Ms Formby to Habitat.
[7] TB 40, cl 2.
The Share Sale Agreement contained a restraint of trade clause, which restrained Little Rhino and Mr Stojsavljevic from competing by way of engaging in a business the same or substantially the same as the business in the Restraint Period or the Restraint Area or soliciting customers during the Restraint Period. The business of Habitat is defined as, 'the business carried out by [Habitat], being commercial and retail interior design and construction'.[8] The Restraint Period and the Restraint Area are defined by reference to cascading clauses which mirror those in the ESA (set out below).
[8] TB 40, cl 1.1.
The ESA was executed on or about the same date by Habitat and Mr Formby. The Recitals in the ESA record that it was a condition precedent of the Share Sale Agreement that the ESA be executed by Mr Formby.[9]
[9] TB 41.
A Shareholders Deed was also executed on or about the same date by Maliza and Mr and Ms Formby.[10] It contained an obligation on the part of each of those shareholders to procure that the directors of Habitat comply with certain restraints.
[10] TB 43.
It is not in issue that the Share Sale Agreement, the ESA and the Shareholders Deed were executed and the transactions were completed on or about 22 February 2013.
In December 2013, the second defendants sold 20 of the 100 shares in Habitat held by them to Maliza for consideration of $200,000.[11]

The ESA restraint clause

[11] TB 78.

The restraint of trade clause is comprised in the 'non‑competition' section of the ESA and its relevant terms are as follows:
13.2Restraint of trade
The Executive agrees with the Company that, during the Restraint Period and within the Restraint Area, the Executive will not, without the Company's prior written consent, directly or indirectly:
(a)engage in or be concerned or interested directly or indirectly in any business or person that:
(i)is the same or similar to the Business or any material part of the Business; or
(ii)in competition with the Business or any material part of the Business;
(b)solicit, canvass, induce or encourage any person who was at any time during the twelve month period ending on the date of termination of the Employment a director, employee or agent of the Company to leave the employment or agency of the Company;
(c)solicit, canvass, approach or accept any approach from any person who was at any time during the twelve month period ending on the date of termination of the Employment a customer of the Company with a view to obtaining the custom of any such person in a business which is the same or similar to the Business; or
(d)interfere with the relationship between the Company and its clients, employees or suppliers.
13.3Application of restraint of trade
The agreement by the Executive in clause 13.2 applies to the Executive acting:
(a)either alone or in partnership or association with another person;
(b)as principal, agent representative, director, officer or employee;
(c)as member, shareholder, debenture holder, noteholder or holder of any other security; or
(d)as trustee of or as a consultant or adviser to any person.
13.4Interpretation
In this clause 13:
(a)Restraint Area means:
(i)Perth and Melbourne;
(ii)Perth, Sydney, Melbourne, Brisbane, Adelaide; Hobart;
(iii)New South Wales, South Australia, Victoria, Queensland and Western Australia;
(iv)Australia;
(b)Restraint Period means:
(i)the period of 2 years after termination of the Employment;
(ii) the period of 1 year after termination of the Employment; or
(iii)the period of 6 months after termination of the Employment.
13.5Operation
Clauses 13.3 and 13.4 have effect as comprising each of the separate provisions which result from each combination of a capacity referred to in clause 13.4 and an area, period and a category of conduct referred to in clause 13.3. Each of these separate provisions operates concurrently and independently. If any separate provision is unenforceable, illegal or void, that provision is severed and the other separate provisions remain in force.
13.6Acknowledgment by Executive
The Executive acknowledges and agrees that each of the restraints imposed upon the Executive under this clause are fair and reasonable and are no greater than is reasonably necessary to protect the Company.
It should be noted that cl 13.5 contains cross‑referencing errors. It is cl 13.2 that sets out categories of conduct. Clause 13.3 deals with capacity. Clause 13.4 deals with area and period. The incorrect references in cl 13.5 are clearly typographical errors. The plaintiffs agree that is the case. Mr Formby challenges the operation of cl 13.5 but on other grounds. In my view, the clause is intended to provide that cl 13.2 and cl 13.4 are to have effect as comprising each of the separate provisions which result from each combination of a capacity referred to in cl 13.3 and an area, period and a category of conduct referred to in cl 13.2 and cl 13.4.[12]

Other relevant ESA clauses

[12] In accordance with the principles in Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420, 426 ‑ 427.

There are other clauses to which reference will be made and it is convenient to now set them out.
In addition to the reference to severance in cl 13.5 as set out above, there is a general severance provision (cl 21):
21.SEVERANCE
If any provision of this Agreement is invalid and not enforceable in accordance with its terms, all other provisions which are self‑sustaining and capable of separate enforcement without regard to the invalid provision, shall be and continue to be valid and forceful in accordance with their terms.
There is an acknowledgment clause dealing with confidentiality and providing that the restraint extends post termination of the ESA (cl 10).
10.EXECUTIVE'S ACKNOWLEDGMENTS
The Executive acknowledges that:
(a)all trade and business secrets and other information and Documents which are not generally known or available or not already known or available to the Executive at the time of disclosure (other than through the Company's disclosure and without breach of this clause 10) but which relate to the affairs or business of the Company and its Related Bodies Corporate or any person with whom the Executive comes into contact as a result of this Agreement, or which come into the Executive's possession in the course and by reason of the Employment, whether or not the same were originally supplied by the Company or its Related Bodies Corporate, are confidential (Confidential Information);
(b)the Confidential Information has been and will be acquired by the Company or its Related Bodies Corporate at the Company's or its Related Bodies' Corporate initiative and expense; and
(c)the Company and its Related Bodies Corporate have spent and will spend effort and money in establishing and maintaining its customer base, employee skills and the Confidential Information. Accordingly, it is reasonable that the Executive should enter into the representations and warranties contained in this Agreement and, if the Employment is terminated, the Executive should continue to be subject to the restrictions set out in clauses 11, 12 and 13.
The term Documents for the purpose of cl 10(a) is defined in cl 1.1 as follows:
Documents includes software (including source code and object code versions), manuals, diagrams, graphs, charts, projections, specifications, estimates, records, concepts, documents, accounts, plans, formulae, designs, methods, techniques, processes, supplier lists, price lists, customer lists, market research information, correspondence, letters and papers of every description, including all copies of and extracts from any of the same.

The Shareholders Deed restraint clause

The restraint clauses in the Shareholders Deed impose obligations on the new and continuing shareholders to ensure the directors comply with certain restraints. The relevant provisions provide:
17.1Interpretation of clause
The provisions of clause 17.2 have effect as if they were separate clauses, each being severable from the other, such separate clauses consisting of each of the undertakings in clauses 17.2(a), 17.2(b) and 17.2(c) and combined with each separate area set out in clauses 17.2(a) to 17.2(d) combined with each separate period set out in clauses 17.2(e) to 17.2(g). Each combination creates a separate and independent obligation although the obligations stated in clause 17.2 are cumulative in effect.
17.2Undertaking not to compete
To protect the interests of all Shareholders in the goodwill of the Business and to protect the interests of the Company, each Shareholder covenants, and agrees to procure that each Director, and subject to 17.5 [not relevant], will not directly or indirectly:
(a)on its own account;
(b)jointly with or on behalf of any other person, firm or company; or
(c)as an employee, manager, director, shareholder, member, partner, joint venture participant, consultant, or in any other capacity,
without the previous consent in writing of the Company be concerned or interested or employed, manage or operate or participate in the management or operation or marketing of any products or services in competition with the Company's activities, products or services or likely to be competitive with that carried on by the Company, within of [sic] the following areas:
(a)Perth and Melbourne;
(b)Perth, Sydney, Melbourne, Brisbane, Adelaide; Hobart;
(c)New South Wales, South Australia, Victoria, Queensland and Western Australia;
(d)Australia;
within any of the following periods:
(e)from the Commencement Date until termination plus two years;
(f)from the Commencement Date until termination plus one year;
(g)from the Commencement Date until termination plus six months.
...
17.6Reasonableness of restraints
Each Shareholder acknowledges that each of the restraint obligations imposed by clauses 17.2 and 17.3 are reasonable in its extent (as to all of duration, geographical area and restrained conduct) having regard to all the interests of each Shareholder and extends no further (in any respect) than is reasonably necessary and is solely to protect the Shareholders in respect of the goodwill of the Company and the relevant Business.

Overarching principles relevant to restraints of trade

A restraint of trade clause is contrary to public policy and prima facie void, unless the restraints are reasonable to protect the legitimate interests of the party seeking to enforce the restraint. The validity of a restraint is to be considered as at the date of the contract.[13] So much was not in issue between the parties. The applicable principles are summarised elsewhere: see, for example, the decision of the Court of Appeal in Smith v Nomad Modular Building Pty Ltd.[14]

The nature of Habitat's business at the time of the ESA

[13] Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288, 318; Smith v Nomad Modular Building Pty Ltd [2007] WASCA 169 [7].

[14] Smith v Nomad Modular Building Pty Ltd [6] - [8].

Habitat was established in 2004 by Mr Formby and Mr Stojsavljevic. That year, it won its first job for Diamond Industries in Bentley. In 2005, Habitat was incorporated and opened an office in Mt Lawley. By the end of 2006, Habitat had undertaken approximately 36 projects.[15]
[15] Exhibit 10 [20], [22], [25] - [26], [29].
In 2008, Habitat won a large scale project for Horizon Power in Bentley for which it received an award from the Design Institute of Australia. In 2009, Habitat expanded to five employees and moved into a larger office in Wembley. By the end of 2011, Habitat's Perth office had expanded to 12 employees and was undertaking approximately 40 projects per year.[16]
[16] Exhibit 10 [30] - [31], [44].
During cross‑examination, Mr Formby was taken to two documents that referred to work either undertaken or being pitched for in Perth and Melbourne at around the time of entry into the ESA.
Mr Formby was taken to Habitat's sales register for December 2012 to February 2013. Mr Formby recalled that Habitat's jobs were located throughout the Perth metropolitan area including Bentley, Guildford, Henderson, Peppermint Grove, Perth CBD, Subiaco, Wembley, and West Perth. He accepted that the Habitat Perth office undertook an office, medical, and hospitality fitout.[17]
[17] TB 290; ts 352 - 354.
Mr Formby was taken to Habitat's pipeline document which details the work for which Habitat was competing in February 2013.[18] Mr Formby accepted that Habitat was pitching for studio, office, hospitality, retail, and medical fitouts. He recalled that Habitat was pitching for work in Cottesloe and Murdoch.[19]
[18] TB 34.
[19] ts 355 - 357.
Mr Formby said that nearly 50% of Habitat's work in Perth was obtained through enquiries sent to Habitat's website that he would follow up. He said that referrals from property managers, building owners and tenant advocates accounted for less than 5% of Habitat's work, although commercial leasing agents did account for 'some of the work' Habitat acquired in Perth CBD and West Perth.[20]
[20] Exhibit 11 [46].
At the time of entering into the ESA, approximately 90% of Habitat's work was in Perth.[21]
[21] Exhibit 2 [46]; ts 98.
The Habitat Melbourne office was established by Mr Formby and Mr Stojsavljevic in January, 2011. The office originally had three employees (sales manager, site supervisor and interior designer), growing to four by the end of 2011. Mr Formby said that Habitat Melbourne generated its leads from Habitat's website and a telemarketer. At the time of entering into the ESA, approximately 10% of Habitat's work was in Melbourne.[22]
[22] ts 345, 98; Exhibit 2 [46]; Exhibit 10 [36], [37], [44].
Mr Formby was taken to two documents that referred to work either undertaken or being pitched for in Melbourne at around the time of the ESA. The Habitat sales register for December 2012 to February 2013 indicates that in addition to numerous jobs in Perth, Habitat Melbourne undertook office fitouts for Melbourne clients. [23] Mr Formby said that he had very little recollection of those jobs, especially those of low value. He accepted that Habitat would have undertaken work outside the CBD and in suburbs such as St Kilda. He said that Duncan Sibley, a sales manager and site supervisor employed by Habitat in Melbourne, would have made the call as to the distance travelled for jobs.[24]
[23] TB 290.
[24] ts 351 ‑ 352.
The Habitat pipeline document details the work for which Habitat was competing in February 2013, including at least four jobs that Mr Formby recalled were in Melbourne.[25] It seems at least two of those jobs were outside the Melbourne CBD (Altona, Whittlesea).
[25] TB 34; ts 354 – 357: Altona RSL - members room refurbishment; Visual Q - retail and accommodation refurbishment; Darcy Group - commercial fitout; Whittlesea - fitout for a respite care home.
According to Mr Formby, approximately 15 projects were undertaken by Habitat Melbourne in the time it was operating. The office ran for three years, and while it did not lose money it did not make enough money to make it worthwhile.[26] In early 2014, Habitat closed its Melbourne office due to poor performance. It re‑opened in October 2016.[27]
[26] Exhibit 10 [37].
[27] Exhibit 2 [49].
Mr Formby accepted that prior to the execution of the ESA, Mr Pritchard had access to financial information and the pipeline documents for Habitat.[28] Therefore the spread of geographic areas where Habitat undertook work was identified to Mr Pritchard prior to entry into the ESA.
[28] ts 378.
I also note that the financial records indicate that for the year ending June 2012, Habitat had income of some $11 million and an operating profit before tax of some $1.5 million.[29]

The nature of Habitat's business more generally and after execution of the ESA

[29] TB 40, page 443 - 444.

Mr Formby was also taken to a fee proposal and company profile prepared by Habitat and submitted to a prospective client, Resi Invest, in October 2014 (Resi proposal). The Resi proposal stated that Habitat worked in commercial, hotel, industrial, hospitality, health and retail. Mr Formby accepted that was accurate. He also accepted that Habitat was open to working in architectural services and project management if Habitat could win the work.[30]
[30] TB 94; ts 358 ‑ 359.
The Resi proposal provided a list of Habitat's clients. Whilst the timing of the jobs is not entirely clear, Mr Formby said that 50% to 90% of Habitat's work for those clients was office fitouts. He confirmed that Habitat undertook fitouts in Applecross, Bentley, Cannington, Dalkeith, Fremantle, Leederville, Mount Lawley, Northbridge, Osborne Park, Subiaco, and Yokine.[31]
[31] ts 360 ‑ 363.
The Resi proposal also listed clients such as Community First in each of Bunbury, Cannington, Fremantle, Maddington and Victoria Park, although Mr Formby said some of those jobs involved only small changes or refurbishments. Mr Formby agreed that Habitat also undertook a fitout for Life Ready physiotherapy in Baldivis, did a fitout for Monson shipping agency in Fremantle, other jobs in Morley, South Perth and Cottesloe and pitched for a hearing clinic in Joondalup.[32]
[32] ts 362, 365 ‑ 366.
Mr Formby accepted that Habitat did or would do fitouts of rooms within buildings such as offices within schools, retail shops within shopping centres and medical suites within hospitals, although it did not undertake fitouts of whole buildings of that nature.[33]
[33] Exhibit 11 [28]; ts 364 ‑ 365.
Mr Formby accepted that Habitat was prepared to do fitout work in the Perth metropolitan area subject to value and distance.[34] It had also done at least one design job in Singapore, pitched for jobs in Singapore and represented in the Resi proposal that it was based in Perth, Melbourne and Singapore.[35]

Mr Formby's role in Habitat

[34] ts 363.

[35] ts 364, 358; TB 94 (cover page).

Mr Formby gave evidence as to the nature of his role. He was the managing director, the only architect on staff, and was the building supervisor for Perth and for Melbourne. As at February 2013, Habitat had approximately ten employees in addition to Mr Formby, including a project supervisor, three interior designers and a financial controller. Mr Formby was the only sales person for Habitat in Perth and he remained its only sales person until he left in February 2016. He was generally in charge of introducing Habitat to prospective clients and then once a project entered the concept plan stage, Mr Formby would largely hand over the running of the job to the general manager and designers.[36]
[36] ts 345 ‑ 350; Exhibit 2 [20], [23], [44] - [45].
Mr Formby was solely responsible for the major sales of the company (being those over approximately $200,000) and for determining the margin on price.[37]
[37] ts 348 ‑ 349.
Mr Formby would prepare proposals and concept designs and rough budgets to submit to clients, quoted on major jobs and oversaw quotes on smaller jobs, and made decisions about which designer would be working on a job. He assisted others with respect to sales under $200,000. He oversaw all of the staff and all the staff reported to him. He was responsible for hiring, for the strategic direction of the company, for developing the website, for marketing decisions and for determining how internal processes of the company were developed in regards to quoting. Mr Formby had access to all information regarding the way in which Habitat won work, undertook the design process, quoted on work, its budgets, operating margins and business opportunities.[38] He had access to suppliers' prices and all job lists.[39] He had regular tradespeople.[40]
[38] ts 347 - 349, 345 - 348.
[39] ts 92.
[40] Exhibit 3 [23].
Mr Formby was also responsible for the Melbourne office. He extended his building licence to Victoria and set up Habitat's office in Abbotsford, a suburb of Melbourne, which ran for three years. He travelled to Melbourne to oversee its operations.[41] Mr Formby says that he trained staff to undertake projects but that Habitat received leads from the website and a telemarketer. Mr Formby was not the predominant sales person in the Melbourne office. That person was Mr Sibley.[42] It was Mr Sibley's task to 'win work' in Melbourne.[43]
[41] ts 349 ‑ 350.
[42] Exhibit 2 [47].
[43] ts 350 ‑ 351, 355 ‑ 356; Exhibit 11 [57].
Under cross‑examination, Mr Formby admitted he was the 'main person', the 'key person' and knew all of the business 'inside out'.[44]
[44] ts 378.
Mr Formby's role in Habitat was anticipated to continue after entry into the ESA. His role is also described in the ESA. See, for example:
5.2Specific duties
The Executive's specific duties included:
(a)managing the business of the Company and its Related Bodies Corporate including, without limitation, implementing strategic and tactical plans and managing operational functions to achieve the Company's goals and outcomes; review and initiate continuous improvement in support and administrative functions; implement employment policies and development of an effective and valued performance management framework;
...
(e)formulating strategies to promote and improve the financial performance of the Company;
...
(h)developing new opportunities and expanding the Company's current activities and market share;
(i)supervising and implementing appropriate financial controls and accounting procedures, and the preparation of financial statements.

The negotiation of the restraint clauses

On 30 December 2012, Mr Pritchard included the following in an email to Mr Formby:[45]
Without an employment contract or shareholder's agreement, Habitat1 arguably has no value whatsoever. Further, no buyer would agree to purchase an interest in a business where no employment contract or shareholder agreements exist; As an example, there is nothing that stops you from closing down Habitat1 today and starting Habitat2 tomorrow; This puts you in an extremely powerful position with respect to achieving the outcome that you need to achieve.
[45] TB 12.
By email from Mr Pritchard to Mr Formby of 9 January 2013, Mr Pritchard said that he would like to confirm his offer to purchase 50% of Habitat subject to various conditions, including:[46]
Execution of satisfactory Employment Agreement for the Managing Director (Christian Formby) which includes appropriate restraints and non‑compete provisions. My understanding is that the present arrangements have no preventative terms on one or both of the directors leaving Habitat1 and commencing a competing entity.
[46] TB 14.
Mr Formby sent a copy of Mr Pritchard's email to Mr Stojsavljevic and also copied it to Darren Shillington of PKF Mack (Habitat's accountants) on 10 January 2013, stating:[47]
Please see below offer to purchase your H1 shares from Geoff Pritchard. I approve of the shares going to Geoff as there is a lot of value to add to Habitat.
[47] TB 15.
On 11 January 2013, Mr Pritchard wrote to Mr Formby noting that he had attained a valuation on the basis of an incoming party acquiring 50% of equity and stating that:[48]
The key advice that I have received is that without Shareholder's Agreement, Employment Contract or Director's Agreement, any value in either this transaction or a future transaction is largely dependent on you as a key person, your goodwill and your agreement to remain committed to a business where 50% of your earnings are 'leaking' to another party.
My advice is that this position is unlikely to be sustainable for you (or any party under a similar arrangement) without the above agreements in place which include the agreed participation for relative contributions to the business.
[48] TB 17.
On 1 February 2013, Mr Formby signed a Binding Term Sheet which included a provision that settlement was subject to a condition precedent that Mr Formby execute a satisfactory employment agreement including appropriate restraints and non‑compete provisions.[49] On 2 February 2013, Mr Pritchard wrote to Mr Formby attaching (relevantly) a draft executive services agreement and a director's appointment letter noting:[50]
These agreements are designed to protect the value of the company and represent best practice and another level beyond where Habitat1 has gone before in the corporate governance process; So although many of these provisions look onerous, it is the shareholders (you and me) and more importantly if we decide to sell, list or realise value later on, future shareholders - that benefit from these agreements being in place.
[49] TB 31, pages 221 ‑ 224.
[50] TB 30.
On 4 February 2013, Mr Formby replied to Mr Pritchard saying that he would read through the drafts prior to a proposed meeting. He also returned the signed Binding Terms Sheet.[51]
[51] TB 31.

On 5 February 2013, Mr Formby forwarded copies of the draft executive services agreement to Libby Bradford at Habitat and to Mr Shillington asking, 'we okay with this?'.[52]
[52] TB 32.
Mr Shillington replied to Mr Formby by email dated 5 February 2013 but making no comment with respect to the restraint provisions.[53]
[53] TB 33.
On 21 February 2013, Mr Formby wrote to Mr Pritchard making comments on both the draft executive services agreement and the draft shareholders' agreement.[54] He made no comment on the restraint provisions.
[54] TB 38.
On 22 February 2013, Mr Pritchard sent draft copies of the various documents to Mr Formby which incorporated some of the amendments requested by Mr Formby.[55] The final form documents were all executed on or about 22 February 2013 without any changes to the restraint provisions.
[55] TB 39.
Under cross‑examination, Mr Formby said that he understood what non‑compete clauses were and acknowledged that he had sought advice on the draft executive services agreement from an accountant. He said he had not read the documents but sent them to his accountant for comment, although he may have skimmed over them. However, he admitted he had read the Binding Terms Sheet. When asked if he knew that Mr Pritchard wanted appropriate restraints and non‑compete provisions, he replied, 'yes'. When asked if he knew why Mr Pritchard wanted restraints, he replied, 'yes'. He knew that a satisfactory employment agreement between him and Habitat, including restraints and non‑compete provisions, would have to be signed as a condition of Mr Pritchard buying in to Habitat.[56]

Preliminary - some matters to be taken into account in assessing reasonableness

[56] ts 375 ‑ 379.

When assessing the reasonableness of the terms of the restraints, it is important to bear in mind that in signing the ESA, Mr Formby made certain acknowledgements as to both the confidential nature of information and the reasonableness of the restraints.
The parties agreed the terms of the definition of Confidential Information and the terms of the restraints in the ESA and did so without negotiation on those terms. Mr Formby had the opportunity to obtain legal and accounting advice on the ESA and he sought advice from his accountant. He requested certain amendments. He did not request amendments to those relevant terms. The parties expressly acknowledged that the restraints were reasonable.[57]
[57] TB 41, cl 13.6.
In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd the High Court said:[58]
It should not be overlooked that to sign a document known and intended to affect legal relations is an act which itself ordinarily conveys a representation to a reasonable reader of the document. The representation is that the person who signs either has read and approved the contents of the document or is willing to take the chance of being bound by those contents, as Latham CJ put it, whatever they might be.
[58] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 [45].
Further, the presence of a confidential information clause militates against acceptance of a proposition that no confidential information exists.[59]
[59] Emeco International Pty Ltd v O'Shea [No 2] [2012] WASC 348 [111], [114] (Emeco [No 2]).
Although the reasonableness of restraints is a matter of law for the court to decide, the court has held on numerous occasions that an acknowledgment that a restraint is reasonable is a matter to which weight should be given in deciding whether or not the restraint is reasonable.[60] This is because the parties are taken to have knowledge of the relevant industry and are in a better position than the court to assess what amounts to reasonable protection.[61]
[60] Smith v Nomad Modular Building Pty Ltd [17]; BDO Group Holdings (Qld) Ltd v Sully [2015] QSC 166 [53], [57] (BDO v Sully); HRX Holdings Pty Ltd v Pearson [2012] FCA 161 [25]; Seven Network (Operations) Ltd v Warburton (No 2) [2011] NSWSC 386 [71] ‑ [72].
[61] Vision Eye Institute Ltd v Kitchen [2014] QSC 260 [266] (appeal on other grounds dismissed: Kitchen v Vision Eye Institute Ltd & Anor [2016] QCA 226).
The fact that Mr Formby also executed the Share Sale Agreement (on behalf of Habitat) and the Shareholders Deed, both of which contained clauses dealing with restraints, is also relevant.

Habitat has legitimate business interest to be protected

It is often noted that courts differ in their attitude to covenants on the sale of goodwill as against employee covenants. It has been said that employee covenants are regarded more strictly.[62] On that basis, parties sometimes go to considerable effort to classify the relationship between the parties as akin to either a vendor/purchaser of goodwill or an employee/employer.
[62] Heydon JD, The Restraint of Trade Doctrine (3^rd ed, 2008) 86 ‑ 91.
The restraints contained in cl 13.2 of the ESA comprise what can generally be described as a non‑compete restraint, a restraint against soliciting customers and a non‑interference restraint (neither party suggested the restraint with respect to soliciting employees was relevant to these proceedings).
Habitat says the covenants are to be looked at in all the circumstances and are not to be considered by reference to employee restraints simply because they appear in an employment agreement.[63]
[63] Plaintiffs' closing submissions filed 13 February 2017 [24].
The submissions filed on behalf of Mr Formby proceed on the basis that the restraints are to be considered in the context of an employer/employee relationship only.[64] In particular, Mr Formby contends that he was not a vendor of the shares, he received no payment under the Share Sale Agreement and accordingly he is in no different position to an employee who, it was submitted, would not ordinarily be subjected to 'vendor/purchaser' restraints.[65]
[64] Defendants' closing submissions filed 9 February 2017 [6].
[65] Defendants' closing submissions filed 9 February 2017 [5] ‑ [6].
A difficulty with Mr Formby's contention is that even in the case of employer/employee relationships, non‑compete restraints, restraints against soliciting customers and non‑interference restraints post termination of employment have been upheld by the courts.[66] Therefore, even if the appropriate classification of the relationship between Habitat as covenantee and Mr Formby as covenantor were limited to one of employer/employee, that fact alone would not render the clauses unreasonable.
[66] Eg Nomad Modular Building Pty Ltd v Smith [2007] WASC 117 (non‑compete restraint against employee upheld on appeal, non‑solicitation clause upheld at first instance and not challenged on appeal); Emeco [No 2] (non‑compete restraint upheld, non‑solicit clause not upheld in light of particular drafting); AGA Assistance Australia Pty Ltd v Tokody [2012] QSC 176 (non‑compete restraint against employee enforced); Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; (2006) 71 NSWLR 9 [25]; BDO Group Investments (NSW‑Vic) Pty Ltd v Ngo [2010] VSC 206 [62] (non‑interference restraint protects goodwill and customer/employee connections).
It is not appropriate to proceed on the basis of an assumed dichotomy between goodwill/employee cases. Rather, attention should be directed to the nature of the legitimate interest that the covenantee seeks to protect.[67]
[67] Bridge v Deacons (a firm) [1984] 1 AC 705, 714; BDO v Sully [41] ‑ [43]; Sear v Invocare Australia Pty Ltd [2007] WASC 30 [52] ‑ [54].
Further, the courts do not look at a covenant in an employment contract in isolation. For example, the court takes into account that the circumstances that lead to the employment are interrelated to a sale of business or sale of shares. As Le Miere J said in Sear v Invocare Australia Pty Ltd:[68]
Where the sale of a business carried on by a company is effected by means of a sale, not of the business itself, but of the issued capital of the company, it is commonplace for the parties to require that promises on the part of the former shareholders be given to the purchaser. Similarly, where the vendors of the shares are not the individuals who are responsible for the management of the company, it is commonplace for a purchaser to require that the individual or individuals who are responsible for management also enter into restraints in order to afford protection to the purchaser in respect of the goodwill for which it is giving consideration.
[68] Sear v Invocare Australia Pty Ltd [51], also citing Synavant Australia Pty Ltd v Harris [2001] FCA 1517 [69].
The court cannot ignore the commercial reality of the relationship established by the ESA, the Share Sale Agreement and the Shareholders Deed.[69]
[69] BDO v Sully [46].
Mr Stojsavljevic wanted to sell the shares held by Little Rhino. Mr Formby also wanted Mr Stojsavljevic to be in a position to sell the shares held by Little Rhino and realise proper value for them.[70] Mr Formby did not seek to buy the Little Rhino shares, but rather negotiated with Mr Pritchard and reached a position where it was Mr Pritchard (or his interests) who provided the $1,000,000 to Little Rhino. Mr Formby saw value in Mr Pritchard coming on board and the evidence suggests Mr Formby was optimistic about the benefits that Mr Pritchard's experience would bring to the table.[71]
[70] Exhibit 10 [66], [73].
[71] TB 15; ts 370.
Mr Pritchard (via Maliza) made a significant investment by purchasing the shares in Habitat. He was aware of the risk that Mr Formby's departure from Habitat would pose to his investment and the financial position of Habitat. He expressly raised the risk and the importance of restraints in his communications with Mr Formby prior to execution of the various deeds, and Mr Formby did not voice any disagreement.
Mr Formby was the key person in Habitat at the time, as is readily inferred from the evidence as to his role set out above. That was also the position espoused by his counsel at the injunction hearing: he 'made the company'.[72]
[72] Habitat 1 Pty Ltd v Formby [17].
There was benefit to the respective family trusts of Mr Pritchard and Mr Formby in ensuring that their shareholdings remained of value. The restraints sought by Habitat and agreed to by Little Rhino and Mr Stojsavljevic in the Share Sale Agreement were important for this purpose. The covenants in the Shareholders Deed requiring the shareholders to procure that both Mr Pritchard and Mr Formby as directors comply with restraints were expressly said to be for the purpose of protecting the goodwill of the Business (of Habitat), and the interests of Habitat.[73] Protection of the goodwill of Habitat in turn benefits its shareholders.
[73] See cl 17.2 of the Shareholders Deed set out above.
Mr Formby was not an employee in a traditional master/servant relationship.[74] He was a director of the company and employed as its managing director. He was in a position of control within the company.
[74] A distinction noted in M & S Drapers v Reynolds [1956] 3 All ER 814, 821: 'A managing director can look after himself'.
The execution of the ESA and the Shareholders Deed were conditions precedent to Maliza's acquisition of the shares.
The mutuality of the obligations with respect to restraints and the obligation of Mr Pritchard to purchase the shares in Habitat under the interrelated documents is clear.
The legitimate interest sought to be protected by the restraints is to be considered against the commercial reality of the relationship. In my view, the legitimate interest encompasses the goodwill of Habitat, confidential information and customer connections. It is not necessary to strictly categorise those circumstances where legitimate interests may be protected.[75]
[75] Sear v Invocare Australia Pty Ltd [53] ‑ [55].
Against that backdrop, the next step is to consider the application of the different restraints in the ESA.

Justification for covenant not to compete

In Emeco [No 2], Edelman J usefully collects authorities where the court has considered non‑compete restraints in the context of employees.[76]
[76] There are various ways to describe such restraints. I have used the expression 'non-compete' restraint as that was the expression used by the parties.
Those cases establish that:
(a)circumstances where non‑compete restraints can be supported are not limited to protecting confidential information.
(b)customer connections may also support a non‑compete clause;[77]
(c)there may be some industries where customer connections alone may justify a non-compete restraint;[78]
(d)a number of authorities support non-compete restraints on the basis of both of those interests;[79] and
(e)it may be that a non‑compete restraint is justified where there is a need to protect customer connections and confidential information even in circumstances in which neither interest alone may be sufficient.[80]
[77] Lindner v Murdock's Garage [1950] HCA 48; (1950) 83 CLR 628, 636; Emeco [No 2] [89].
[78] Emeco [No 2] [85].
[79] Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 709; Emeco [No 2] [88].
[80] Emeco [No 2] [86].
In AGA Assistance Australia Pty Ltd v Tokody, a senior manager involved in selling insurance was found to be in breach of a non‑compete clause. McMurdo J referred to both customer connections and information about the employer's dealings with clients, as advantages which the employee could bring to a new employer. His Honour concluded that the protection of these interests of the plaintiff warranted a restraint which prevented the defendant from working in a competing business in Australia for 12 months.[81]
[81] AGA Assistance Australia v Tokody [32].
In Pearson v HRX Holdings Pty Ltd,[82] Mr Pearson was the primary presenter to prospective clients with respect to recruitment process outsourcing and consulting. The Full Federal Court upheld a non‑compete restraint which restrained Mr Pearson for two years from directly or indirectly carrying on a Restrained Business, alone or in partnership or joint venture with anyone else. Mr Pearson was also restrained from being directly or indirectly 'concerned with or interested' in a Restrained Business, including as an employee. Restrained Business was defined (in summary) as a business or operation similar to or competitive with the business of a Group Company.[83]
[82] Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111.
[83] HRX Holdings Pty Ltd v Pearson [19], [22].
The enforceability of the particular non-compete restraint in that case was supported by the Full Federal Court not on the basis of confidential information, but on the basis of 'HRX's interests, both in protecting its customer connections and in ensuring the diligent and faithful pursuit by Mr Pearson of business opportunities for HRX'.[84]
[84] Pearson v HRX Holdings Pty Ltd [51], [62].
In Emeco [No 2], Edelman J found that Emeco had an interest in protecting confidential information and customer connections. A non‑compete restraint that applied to a business development manager throughout Western Australia for a period of six months was held to be enforceable.
Habitat relies in particular on protection of confidential information in support of the restraints. It says that Mr Formby has acquired confidential information and it is entitled to ensure such information is protected.

Habitat's confidential information

As appears from the description of Mr Formby's role discussed above, he has been the driver of the business since its establishment.
Mr Formby developed and therefore had access to all of Habitat's corporate information including the way in which it undertook the marketing of the business, how it went about its design function, its procedures for identifying work for which to bid, its procedures for quoting work, the margins to be made on each job.[85] He knew customer lists, had detailed customer knowledge through his role in securing those customers, and knew about Habitat's strategic plans. He knew terms of contracts and knew about the profitability of contracts.
[85] ts 348 ‑ 349.
Mr Formby was the managing director of a small entity. His knowledge of that company's operations was necessarily substantial. At least insofar as Perth is concerned, he was the main sales point and secured the deals. He had knowledge of the pipeline of work for the company.[86]
[86] Exhibit 11 [56].
He had access to all information about the company. He attended board meetings and prepared papers for the board.
It does not matter that more specific confidential information cannot necessarily be identified.
In Nomad Modular Building Pty Ltd v Smith, Master Sanderson noted at first instance that:[87]
With respect, it is clear that the defendant does possess confidential information. The definition is very wide. The defendant was the head of the manufacturing section of the plaintiff. It is inevitable that he, during his 12 months of employment, picked up concepts and technical and operational information used by the company. He also undoubtedly had an insight into the financial affairs of the plaintiff. He received management reports, albeit in somewhat limited form. These reports disclosed in some detail the financial position of the plaintiff. They showed the work which had been obtained, work which had been tendered for and tenders on which the plaintiff had been unsuccessful. All of this information was confidential.
It is not possible to say with any precision precisely what the defendant knows which falls within the definition of confidential information. There is no suggestion that he has removed any sensitive documents from the plaintiff or that he has in some way expropriated trade secrets or lists of clients which will assist him in his new employment. Only he knows what he knows and any attempt to define the limit of his understanding is pointless.
[87] Nomad Modular Building Pty Ltd v Smith [13] ‑ [14].
On appeal, Pullin JA noted that the respondent employer was aware of work the employee was seeking to obtain, was aware of major tenders lost, and gained information about profits and margins.[88] Further:[89]
There was an argument advanced by the appellant that the information was not sufficiently confidential to support the reasonableness of the restraint clause, but that was a matter of assertion only. The appellant was a top level employee and his salary package reflected this. As the general manager of manufacturing he was privy to much strategic and operational information which a competitor would be interested to know and which the respondent was entitled to keep confidential by contractual means.
[88] Smith v Nomad Modular Building Pty Ltd [31].
[89] Smith v Nomad Modular Building Pty Ltd [39].
The information in that case was considered sufficiently confidential to justify a non‑compete restraint.
In Emeco [No 2], the employee was the business manager and so one of those persons who were the 'face of the company'.[90] He had full access to all of the employer's information including as to upcoming opportunities and the status of those opportunities. He was the particular point of contact for certain clients. He was involved in the preparation of strategic plans and had access to collated information referring to clients and jobs.[91] Such information was considered sufficiently confidential to justify a restraint.
[90] Emeco [No 2] [24].
[91] Emeco [No 2] [135], [138], [145].
Counsel for Mr Formby submits that information as to Habitat's business was not of a confidential nature or that Mr Pritchard did not point to any confidential information. Counsel referred to Ms Bradford's evidence to the effect that all staff had access to the computer system.[92] Counsel contended that the knowledge Mr Formby had was simply common industry knowledge.[93]
[92] ts 293.
[93] ts 144 - 145; Defendants' closing submissions filed 9 February 2017 [10(c)].
I do not accept that simply because others within a company have access to confidential information, the nature of that information as confidential is thereby compromised.

Further, there is a distinction between merely having access to information (some of which may be in the public domain) and having the tools, systems and expertise to collate and utilise such information for the strategic benefit of a business. Mr Pritchard explained that confidential information is utilised in pricing, margins, taking the business from concepts to working drawings and how work is undertaken in order to win work over competitors.^[94] I accept that would be so.
[94] ts 142, 144.
In my view, discretion is exercised within a company as to the use made of information it holds. The particular collation of information and the way it is utilised may be the key to a profitable business, the key that enables a business to be competitive.[95] One particular example of Habitat's collated information which I consider would be confidential are the documents referred to as pipeline documents which indicate work tendered for and Habitat's assessment of the probability of that tender being successful, a probability assessed by Mr Formby.[96] One can see close parallels between such documents and the 'overview' documents considered in Emeco [No 2] and found to be confidential.[97]
[95] Landmark Underwriting Agency Pty Ltd v Kilborn [2006] NSWSC 1108 [60].
[96] ts 354.
[97] Emeco [No 2] [138].
That is but one example of use of information in a manner that produces, in my view, a product confidential to Habitat. Such documents existed at the time the ESA was entered into.
For various reasons, I consider there existed information confidential to Habitat, that Mr Formby had access to confidential knowledge and that a restraint is justified.
First, Mr Formby expressly acknowledged that all trade and business secrets and other information and Documents which are not generally known or available other than by disclosure from Habitat are confidential.[98] 'Documents' is defined broadly.[99]
[98] TB 41, cl 10.
[99] TB 41, cl 1.1.
Second, Mr Formby's role as managing director was a senior role which included developing strategies for securing and retaining clients and inevitably included the development of relationships of trust with those clients and ascertaining information from them.[100] I note that counsel asserted that there is no evidence that Mr Formby in fact had any particular knowledge of customer preferences or purchasing habits.[101] Absent any admission, it is not uncommon that knowledge must be inferred. In my view there is sufficient evidence of Mr Formby's role and involvement in the company from which I can infer such knowledge. In any event, it would have been expected that he would have such knowledge at the time of entry into the ESA.
[100] Emeco [No 2] [119].
[101] Defendants' closing submissions filed 9 February 2017 [10(j)].
Third, Mr Formby made a recommendation to the Habitat board, referred to in his managing director's report for a board meeting in April 2014, that employee contracts should include clauses dealing with 'non‑compete clause/approaching our clients'.[102] Although this did not occur until after the ESA was entered into, it suggests that despite his claims to the contrary, Mr Formby considered that there was confidential information that should be protected for the benefit of Habitat. There is nothing to suggest that Mr Formby was seeking to protect information of a type that did not exist at the time of entry into the ESA. Mr Formby's evidence as to his recommendation was that, as far as he knew, it was only included in contracts after he left.[103] That is not to the point. It is the fact that Mr Formby recognised a need for restraints that tells in favour of the existence of confidential information.
[102] TB 84.
[103] Exhibit 11 [48].
Fourth, although Mr Formby claimed he was not aware of any specific confidential information that he utilised,[104] I do not accept that was in fact the case. There was confidential information to which Mr Formby was privy. At a general level, there is the kind of information referred to in Smith v Nomad Modular Building Pty Ltd and in Emeco [No 2] and found to be confidential. Although such information has been found to be confidential in one case it does not follow that it will be confidential in another; but having considered the nature of the industry and the type of information, I find that Habitat acquired and maintained confidential information.
[104] Exhibit 11 [29(c)].
Fifth, the difficulty in distinguishing between confidential and non-confidential information is one of the factors that supports the grant of a restraint. Merely relying on confidentiality undertakings may well not offer sufficient protection.[105] For this reason, and contrary to Mr Formby's submission, I do not consider that sufficient protection can be provided by attempting to restrain disclosure of particular identified information.[106]

Customer connections

[105] Miles v Genesys Wealth Advisers Ltd [2009] NSWCA 25 [22].

[106] Defendants' closing submissions filed 9 February 2017 [10(k)].

It is necessary to consider the customer connections that Mr Formby would have been expected to make at the time of entry into the ESA. In this context, Mr Formby's role description is important. It specifically notes that it includes, 'developing new opportunities and expanding the Company's current activities and market share'. The evidence as to his key role in sales is important. He was the only sales person for Habitat in Perth prior to entry into the ESA and he remained its only sales person until he left in February 2016.[107] He was generally in charge of introducing Habitat to prospective clients. He was also in charge of pricing jobs for those clients.
[107] Exhibit 2 [20].
Mr Formby said that, 'Any suggestion that Habitat performed multiple work for repeat clients is not true. The vast majority of Habitat's work was one off fitouts for entities that Habitat had never previously worked for'.[108]
[108] Exhibit 11 [46(f)].
I accept that, based on the list of jobs as at 2013 prepared by Ms Bradford,[109] most jobs were 'one offs'. However, contrary to Mr Formby's statement, there was evidence of some repeat work for clients at the time of entry into the ESA. For example, Mr Formby accepted under cross‑examination that there had been repeat work for Horizon Power,[110] the Publican Group,[111] and Acton Real Estate.[112] There was evidence by the time of the Resi proposal of repeat work for Community First.[113]
[109] TB 290.
[110] ts 351.
[111] ts 353.
[112] ts 361; TB 94 (Applecross, Dalkeith, Fremantle, Mt Lawley and Subiaco).
[113] ts 362; TB 94 (Bunbury, Cannington, Fremantle, Maddington and Victoria Park).
Further, shortly prior to his departure, Mr Formby informed the board that Habitat was becoming a preferred supplier for medical suites within several hospitals.[114] He also gave evidence that during 2014 and 2015 he called agents who were leasing medical suites around Fiona Stanley Hospital and obtained at least 13 jobs for Habitat fitting out medical suites.[115] This evidence of agent contact and sales, although occurring after entry into the ESA, is relevant when considering the estimates that the parties were making as to future developments when entering into the ESA.[116]
[114] ts 364; TB 209. See also TB 282 and the reference to Life Ready in each of Warwick, Cockburn and Baldivis (page 1884, January 2016).
[115] Exhibit 11 [46(d)].
[116] Smith v Nomad Modular Building Pty Ltd [7]; Emeco [No 2] [68], [122] ‑ [123].
In my view, it was reasonable to conclude at the time of entry into the ESA that Mr Formby would obtain personal knowledge and influence over customers and that he would have customer connections which were of the type that can be protected legitimately by a non‑compete restraint. That there were repeat customers reinforces this view. It is not necessary to show that a customer saw Mr Formby as the only attraction in retaining Habitat: I am satisfied that it was expected at the time of entry into the ESA that Mr Formby would have connections with customers such that a change in his employment would potentially lead to a customer deciding to follow Mr Formby elsewhere.[117]
[117] See AGA Assistance Australia v Tokody [18].
Taken in combination with the expected knowledge of confidential information already referred to, I consider that the extent of customer connections is sufficient to justify a non‑compete restraint.

Is the extent of the non-compete restraint reasonable

Mr Formby contends that the restraints are in any event unenforceable as being unreasonable in that they operate as a universal restraint and are too wide and for too great a period.
In supplementary written closing submissions,[118] counsel for the defendants raised two further arguments:
(a)that there is uncertainty within the drafting; and
(b)that the cascading clause is unenforceable on the basis it creates uncertainty.

Universal restraint

[118] Defendants' further submissions filed 3 March 2017; Defendants' further submissions filed 9 March 2017.

Mr Formby submits in effect that the market for fitout work in Perth and Melbourne is enormous and varied and the terms of the restraint prevent him working in the commercial fitout sphere at all. It was said to be a universal restraint.
This submission ignores the wording of the restraint. As set out above, cl 13.2(a) provides that Mr Formby must not directly or indirectly:
(a)engage in or be concerned or interested directly or indirectly in any business or person that:
(i)is the same or similar to the Business or any material part of the Business; or
(ii)in competition with the Business or any material part of the Business.
The clause considered in AGA Assistance Australia v Tokody was to similar effect,[119] as was the clause in BDO v Sully.[120] There is no suggestion that Habitat sought to compete for all fitout work in Perth or Melbourne. As the role of Mr Formby suggests and as the pipeline documents suggest, jobs were targeted for tender. By way of further example, the dashboard report included in the Board Report dated 10 February 2016 identified a target range of $250,000 to $600,000 for average value per project.[121] Mr Formby described a job with a value of $240,000 as an average job.[122] I have set out above the nature of Habitat's business. I infer from such evidence that Habitat identified jobs for which it had appropriate capabilities and which fell within its strategic plans. That also follows as a matter of common sense.
[119] AGA Assistance Australia v Tokody [19].
[120] BDO v Sully [30].
[121] TB 282, page 1881.
[122] ts 352.
The businesses in which Mr Formby might be restrained from working are narrowed by the use of words such as 'similar to' and 'in competition with'. That is, whether or not the restraint operates depends on the business of Habitat and the business of the proposed new employer. It is only if the businesses compete or are sufficiently similar that the restraint will operate. A similar submission that such a restraint operates as a universal restraint on work was considered and rejected in Pearson v HRX Holdings Pty Ltd. The Court of Appeal said that the phrases are a composite expression encompassing business operations which were actually competitive with the employer's business or potentially so by reason of their similarity.[123]
[123] Pearson v HRX Holdings Pty Ltd [43].
At trial, Mr Formby sought to rely on data collected from a 'Council of Australian Governments report', an 'Office Market Report Statistical Summary July 2013' and URBIS shopping centre statistics as to the square meterage of office, hotel, shopping centre, supermarket, school and university, law court and correctional facility space available in each of Perth and Melbourne.[124] Mr Formby then sought to give evidence from his own experience as to the frequency of turnover of fitouts and the cost per metre for such fitouts in purporting to establish the size and value of the fitout market in each of Perth and Melbourne. I will not set out his purported conclusions as I accord them no weight, other than as to square meterage.
[124] TB 293.
Habitat accepted for the purpose of the trial that the third party data as to square meterage was correct but objected to Mr Formby's purported market evidence that utilised the data by multiplying it by his estimates of costs and turnover across a sector of industries. The basis of the objections was that Mr Formby purported to give expert evidence without seeking to qualify himself and he did not adequately set out the facts upon which it was based.
Mr Formby's witness statement was tendered on the basis the objections to the market evidence would be dealt with in these reasons. I have admitted the evidence as to square meterage. That is to the effect that:
(a)in 2012, there was approximately 5,051,000 sqm of office space in Perth (comprising both stand alone and non‑stand alone);[125]
(b)in 2012, there was approximately 13,763,000 sqm of office space in Melbourne (comprising both stand alone and non‑stand alone;[126]
(c)in 2012, there was approximately 2,766,000 sqm of retail space in Perth and 7,491,000 sqm of retail space in Melbourne.[127]
[125] Exhibit 11 [6]
[126] Exhibit 11 [5]
[127] TB 293 [6].
At most, that evidence suggests that there is a large potential market for office and retail fitout work in Perth and Melbourne. In the context of the data relied upon by Mr Formby, the figures he provides for Perth and Melbourne are not limited to the Perth CBD or Melbourne CBD.[128]
[128] This is apparent from, for example, TB 293. The approximate office space for Perth CBD and Melbourne CBD is set out at [14] and [15]. The CBD estimates are considerably lower than the approximate office space for Perth and Melbourne set out at [5] and [6] and used by Mr Formby in his calculations.
However, as to the balance of Mr Formby's calculations, the alleged dollar values of the market asserted are too general to be accepted as accurate. Counsel for Mr Formby conceded there may be a plus or minus 30% variance.[129] Mr Formby does not confine his evidence to experience based on fitouts in which he has been involved but seeks to speak further of fitouts across a range of buildings (schools, prisons etc). The level of generalisation as to the fitout costs and turnover rates of 'office space' and 'retail space' denies it any material forensic value.
[129] ts 343.
More significantly, such information says nothing as to the potential work for which Habitat or a competing business may have tendered or the work it may have secured within that market. The section of the market in which Habitat might compete is unidentified.
Accordingly, I uphold the objections to the identified paragraphs.[130]
[130] For the above reasons and as per the schedule of objections filed 27 January 2017: as to Exhibit 11, objections upheld as to [7] – [26], save for the sentences identified for [14] and [20].
Whether or not restraints are to be upheld as reasonable is determined by taking into account the particular business of the covenantee. It is that business the restraints seek to protect.
I add that nothing in the restraint prevents Mr Formby from working in the building industry more generally. He is a qualified architect and builder and has other professional experience and interests.[131] This is dealt with further below.

Cascading clauses - general

[131] Habitat 1 Pty Ltd v Formby [38] ‑ [46].

Having formed the view that the restraints are otherwise valid, it is necessary to turn to the operation of the cascading clause and Mr Formby's contention that is unenforceable. Mr Formby asserts the clause is uncertain because of numerous potential permutations and the omission of an 'or' at the end of cl 13.4(a).
The potential for a range of permutations does not render the clause uncertain. It is well established that where a covenant may have many combinations but it is clear that the combinations are to operate as separate restraints, then the clause may be valid. See, for example:
(a)JQAT Pty Ltd v Storm,[132] where combinations were to operate as separate restraints, albeit cumulative and overlapping, and it was clearly the parties' intention to impose 18 different restraints of which some might be valid and others (which could duly be severed) might not;
(b)Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd,[133] where a covenant with as many as 120 combinations was not void for uncertainty because of the clear provision in the contract specifying that each combination of variables was intended to operate as a separate restraint; and
(c)Sear v Invocare Australia Pty Ltd,[134] in which it was expressly provided that each covenant provided for by the relevant cascading clause constituted an independent and separate restraint and any such covenant that is unenforceable was deemed to be severed.
[132] JQAT Pty Ltd v Storm [1987] 2 Qd R 162.
[133] Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505.
[134] Sear v Invocare Australia Pty Ltd [35] ‑ [39].
The provisions in this case are to similar effect. The potential for numerous combinations does not make the cascading clause uncertain. Clause 13.5 provides that the combinations specified in cl 13.2, cl 13.3 and cl 13.4 are to operate as separate restraints.
In my view, the absence of an 'or' does not undermine the argument. Its omission is likely a typographical error, but in any event its inclusion can be implied at the end of cl 13.4(a)(iii), in accordance with the principles in Fitzgerald v Masters.[135] The areas are clearly not to be read cumulatively. Clause 13.5 refers to 'each' area in cl 13.4. The clause must be read sensibly.
[135] Fitzgerald v Masters (426 ‑ 427).
The number of permutations is not so great as to make the task of the court burdensome. The different capacities in cl 13.3 are distinct and whether Mr Formby falls within those capacities is a matter to be determined by the facts at any particular relevant time. The same applies as to the businesses referred to in cl 13.2(a) and the conduct referred to in cl 13.2. There are four restraint areas and three restraint periods, resulting in 12 permutations of area and time period. I consider a genuine attempt has been made to consider the different levels of protection that the Company might seek to invoke and that the number and scope of options is not so extensive as to render the clause unenforceable.[136]

Geographic area

[136] Sear v Invocare Australia Pty Ltd [40] ‑ [46] and cases cited therein.

It was also said that the geographic restraint was unreasonable.
Clause 13.4 of the ESA cascades the areas as:
(i)Perth and Melbourne;
(ii)Perth, Sydney, Melbourne, Brisbane, Adelaide; Hobart;
(iii)New South Wales, South Australia, Victoria, Queensland and Western Australia;
(iv)Australia.
Habitat relies on the lowest level in the cascade only: that is, Perth and Melbourne.
I note that Mr Formby did not plead or open his case on the basis that references to 'Perth' and 'Melbourne' rendered the geographic restraint uncertain and so voidable as a whole (although such submission had been made during the interlocutory proceedings).[137] Such contention was not included in particulars that were requested and supplied prior to trial as to how the restraint clause was said to be unenforceable.[138] It was not addressed during the trial. It was only addressed by Mr Formby in supplementary written closing submissions. This approach limited the attention given to the issue. Habitat did, however, provide responsive submissions.
[137] Habitat 1 Pty Ltd v Formby [65] ‑ [66].
[138] Amended further and better particulars of defence and counterclaim filed 24 January 2017.
I find that 'Perth' in the context of the ESA means the metropolitan area of Perth. Taking into account the objective circumstances at the time of entry into the ESA, Habitat was quite clearly operating within the metropolitan area of Perth, had very significant jobs in suburbs such as Bentley and, taking into account documentary evidence such as the pipeline document, the expectation at the time of entry into the ESA was that Habitat would continue to operate in (at least) the metropolitan area.

Ms Bradford then took steps to ascertain all amounts owing to and from Mr Formby, taking into account an entitlement to one month's notice as set out in the letter.
After Mr Formby left Habitat, Mr Pritchard became aware that Mr Formby had deleted all of his emails before departing Habitat's office.[347] Mr Formby admitted under cross‑examination that he had deleted the emails.[348] Habitat utilised a specialist to recover those emails.[349] After their recovery, Mr Pritchard found information which he did not previously have and which Habitat now relies upon in support of a right to terminate Mr Formby's employment summarily without notice.
[347] Exhibit 2 [158].
[348] ts 439.
[349] Exhibit 2 [159].
Habitat distinguishes the conduct relied upon solely with respect to summary dismissal and that also relied upon as gross misconduct.^[350]

Termination provisions in ESA

[350] Plaintiffs' opening submissions [27], Plaintiffs' closing submissions [112] ‑ [127].

It is first necessary to consider the relevant terms of the ESA as to termination.
The following are relevant:
14.1Termination by the Company with reason
The Company may at its sole discretion terminate the Employment in the following manner and in accordance with the NES under the Fair Work Act:
...
(b)by giving one (1) month's written notice if at any time the Executive:
(i)commits any serious or persistent breach of any of the provisions contained in this Agreement and the breach is not remedied within 14 days of the receipt of written notice from the Company to the Executive to do so;
(ii)in the reasonable opinion of the Board, is absent in, or demonstrates incompetence with regard to the performance of the Executive's duties under this Agreement, or is neglectful of any duties under this Agreement or otherwise does not perform all duties under this Agreement in a satisfactory manner, provided that the Executive:
(A)has been counselled on at least three separate occasions of the specific matters complained of by the Board; and
(B)after each such occasion has been provided with a reasonable opportunity of at least a month to remedy the specific matters complained of by the Board;
(iii)the Executive commits or becomes guilty of any Gross Misconduct; or
(iv)refuses or neglects to comply with any lawful reasonable direction or order given to the Executive by the Company which the Executive, after receipt of prior notice, has failed to rectify to the reasonable satisfaction of the Company within 21 business days of receipt of that notice; or
(c)summarily without notice:
(i)if at any time the Executive is convicted of any major criminal offence…; or
(ii)in accordance with clauses 18.3 or 19.2.
14.2Payment in lieu of notice
The Company may at its sole discretion dispose with the written notice period that must be given to the Executive under clauses 14.1(a) and 14.1(b) and immediately terminate the Employment by making a payment to the Executive equal to the Salary payable for the relevant period of notice.
14.3Termination by the Company without reason
(a)The Company may at its sole discretion terminate the Employment by giving three (3) months' written notice to the Executive and, at the end of that notice period, making payment to the Executive equal to the Salary payable over a three (3) month period.
18 INTERNET
…
18.3Termination if breach
If the Company considers that a material breach of its policy concerning the use and access to the internet has occurred, the Company has the right to terminate this Agreement without notice.
…
19ELECTRONIC MAIL
…
19.2Breaches of email policy
If the Executive places information on the Company's electronic mail which:
(a)is discriminatory in nature;
(b)if communicated to another person, could constitute sexual harassment;
(c)is defamatory or libellous;
(d)contains disparaging remarks about the Company, its consultants, competitors, clients or any other person with whom the Company has any dealings;
(e)without having obtained the prior written consent of the Company, contains Confidential Information or intellectual property of the Company: or
(f)is in breach of any provisions of this Agreement or the Executive's duties as an employee of the Company,
the Company has the right to terminate this Agreement without notice. For the avoidance of doubt where a third party sends any offending electronic mail to the Executive, the Executive is not considered to have placed that electronic mail on the Internet unless that party sends such electronic mail onto another party.
Clause 14.1(b) refers to Gross Misconduct. That term is defined in cl 1.1:
Gross Misconduct means any act, neglect or default or conduct committed, including without limitation, neglecting to properly discharge the Executive's duties under this Agreement with the direct or indirect effect of causing any damage or discredit to the Company's business which the Executive, after receipt of proper notice, has failed to rectify to the reasonable satisfaction of the Company within 7 days.
Habitat does not seek to rely on termination in accordance with common law rights, although it points to examples of conduct that comprise breaches of contractual obligations to act in due faith and in the faithful discharge of duties to an employer. Habitat pleads and relies in its submissions on cl 14 of the ESA.[351] In any event, the detailed grounds and steps set out by cl 14 are such that properly construed, common law rights with respect to dismissal are intended to be displaced.[352]

Summary dismissal

[351] Reply and defence to counterclaim [6]; Amended further and better particulars of reply and defence filed 31 January 2017; Plaintiffs' closing submissions filed 13 February 2017 [112].

[352] Concut Pty Ltd v Worrell [2000] HCA 64; Heugh v Central Petroleum Ltd [No 5] [2014] WASC 311 [87].

By cl 14.1(c), the circumstances where the right to terminate summarily without notice may be exercised are strictly limited: where there has been a criminal offence, a breach of the internet policy or a breach of the email policy.
On the facts, Habitat could only terminate Mr Formby's employment summarily in accordance with cl 19.2 (breach of email policy).
Insofar as Habitat was not aware of such breaches at the time, it relies upon Shepherd v Felt and Textiles of Australia Ltd.[353] It says the breaches were uncovered when Mr Pritchard obtained access to emails after Mr Formby left.
[353] Shepherd v Felt and Textiles of Australia Ltd [1931] HCA 21; (1931) 45 CLR 359.
Dismissal without notice is a significant step and care must be taken to ensure that the appropriate evidentiary burden is met.

Termination without notice

Habitat relies on cl 19.2(e) and (f). First, it relies on emails passing between Mr Formby and three entities, being Westpac, GMO Valuations and NXT Enterprises, and says they contain Confidential Information, within the meaning of cl 19.2(e).[354]
[354] Definition of Confidential Information in the ESA is set out above.
Second, Habitat relies on the same emails passing between Mr Formby and Matt Turnbull of Westpac, and also on emails that passed between Mr Formby and Daniel Bird, and says they comprised information in breach of Mr Formby's duties as an employee of Habitat, within the meaning of cl 19.2(f).
I infer from Mr Pritchard's discovery of the emails after termination that at no point did Mr Formby obtain Habitat's consent to the alleged emailing of the information.

Westpac

In August 2015, Mr Formby contacted Mr Turnbull of Westpac to set up an overdraft account for Hawk Crest.
Habitat relies on an email sent by Mr Formby to Troy Wood (apparently a family member) dated 24 November 2015 as indicating Habitat confidential information had been provided to Westpac.[355] Mr Formby writes:
Troy Westpac has asked for a copy of previous tax return … to set up the temporary overdraw against Hawk Crest. I have provided mine and Habitat's also.
[355] TB 154.
Habitat also relies on an email sent by Mr Turnbull to Mr Formby dated 15 December 2015.[356] Mr Turnbull writes:
Just following up on the info sent through already. All good with the financials and tax returns for Habitat.
[356] TB 235.
Habitat's financials and tax returns are not attached to either email.
Mr Formby denied that he sent Mr Turnbull Habitat's financial information. Mr Formby said that Mr Turnbull would have already had Habitat's financial information because the bank had been Habitat's bank for probably seven years. Mr Formby accepted that, according to the email dated 15 December 2015, he had provided Westpac with Habitat's up‑to‑date financials and that it was for the purpose of a Hawk Crest overdraft, but he did not recall sending them.[357]
[357] ts 412 ‑ 414.
Even assuming they were provided, there is no evidence that Mr Formby sent Habitat's financials and tax returns to Mr Turnbull using Habitat's electronic mail facilities.

GMO Valuation

Mr Formby retained a firm referred to as GMO Valuations (GMO) to provide a valuation of the Habitat business for the purpose of his family court proceedings.
Habitat relies on GMO's valuation for Habitat dated 8 February 2016. The valuation states that it was prepared from records and information supplied by Habitat.[358] It lists various financial information about Habitat and it can be assumed that some is Confidential Information. Mr Formby accepts that he provided GMO with financial information to obtain a valuation of Habitat for his divorce proceedings.[359] However, there is no evidence it was provided to GMO using Habitat's email.

NXT Enterprises

[358] TB 203.

[359] ts 440.

In December 2015, Mr Formby corresponded with an entity called NXT Enterprises about precedent contracts. Habitat relies on an email sent by Mr Formby to NXT Enterprises dated 9 December 2015. Mr Formby says 'The AS4906 contract between WesTrac and [Habitat] is a full version of the contract'.[360] Mr Formby accepts that he sent this email.[361] The contract does not appear to have been attached to the email. The email also refers to another contract which has modifications from Freehills (lawyers). Mr Formby states in his email that he cannot send it due to its size. I accept that a Habitat contract may well contain confidential information. Mr Formby also accepted that he showed the contracts to NXT.[362] However, it is not established that the Habitat email server was used to email such contracts.

Communications Formby to Westpac and Formby to Bird

[360] TB 236.

[361] ts 440.

[362] ts 440.

The relevant emails between Mr Formby and Westpac (Mr Turnbull) are referred to above. As to Mr Bird, in September 2015 Mr Formby proposed to undertake a project with Mr Bird outside Habitat. Mr Bird was employed elsewhere. Mr Formby sent three emails to Mr Bird using the Habitat email address.[363]
[363] TB 142.
Those emails do not contain relevant information about Habitat. Rather, they comprise communications between Mr Formby and Mr Bird about the corporate entities they would use for the proposed project, how profit share would work, how expenses and insurance would be dealt with and what agreements they needed to put in place.
By way of background:
(a)in October 2014, Habitat had provided a proposal for architectural and construction services for the Mandurah apartments (the Resi proposal referred to above);
(b)Habitat provided architectural design and documentation services and issued an invoice to the owner;[364]
(c)in December 2014, Mr Formby's company, FBY Global, issued an invoice to Habitat for architectural services for the project ($16,500);[365]
(d)Habitat did not pursue the construction of the apartments. Construction was not part of the core focus of Habitat at that time and Mr Pritchard was not sure Habitat would be able to do it;[366] and
(e)in his emails with Mr Turnbull of Westpac, Mr Formby said he had a signed construction contract for that job in the name of Hawk Crest.[367] Mr Formby accepted Hawk Crest had entered into a contract at that time. However, Hawk Crest was not a registered builder.[368] It appears a contract was entered into for the job between Mr Formby as contractor and the owner in December 2015.[369]
[364] TB 95, 96.
[365] TB 98A. FBY Global was paid by Habitat. The invoice was for $15,000 + GST of $1500.
[366] Exhibit 5 [11].
[367] TB 241.
[368] ts 412.
[369] TB 163.
The communications with Mr Bird appear to relate to them undertaking the construction and project management for the Mandurah apartments.
The complaint then is that by those emails Mr Formby placed information on Habitat's email which is in breach of his duties to serve Habitat and use his best endeavours to promote its interests and welfare and his duty to not compete with Habitat.
The argument relies on cl 19.2(f). It gives rise to a construction question.

The construction of cl 19.2 ESA

The question is whether cl 19.2(f) is to be read narrowly such that it is the information that must be in breach of duty or whether it is to be read more broadly such that it is the conduct in placing information on the company email that comprises the breach.
If the narrower approach is correct, then I do not consider the relevant emails comprise 'information which is in breach of duty'. It is the information itself that must be 'in breach'. The conduct in placing the emails may well evidence a breach of duty by, for example, utilising time which should have been devoted to Habitat or by competing with Habitat, but reliance on such conduct to terminate without notice requires a broader reading of cl 19.2.
Habitat was not interested in undertaking the construction for the Mandurah job. None of Mr Formby, Hawk Crest or Mr Bird were competing with Habitat for that job. Habitat's real complaint is that Mr Formby was using time that should have been devoted to Habitat to correspond about that matter and not focussing on Habitat.
In my view, such conduct would be caught potentially by cl 19.2(f) only if it is construed to mean that it is the conduct in the placing of the information that is a breach of duty.
On a proper reading of the chapeau and each of cl 19.2(a), (b), (c), (d) and (e), the subject matter that the subparagraph refers to is the 'information'. For example, cl 19.2(a) operates as follows:
If the Executive places information on the Company's electronic mail which is discriminatory in nature, the Company has the right to terminate…
It is clear that it is the information that must be discriminatory. It does not make sense to suggest it is the conduct in placing the information that must be discriminatory. For each of cl 19.2(b), (c), (d) and (e) the position is the same. The content qualifies the information.
The question is whether the clause should be read inconsistently insofar as cl 19.2(f) is concerned. Clause 19.2(f) may not be easy to apply when construed in the same manner as for each of cl 19.2(a) to (e). One could argue that in order to give cl 19.2(f) meaningful operation, it should be read so that the wording of cl 19.2(f) qualifies the placing of the information rather than the information alone.
I prefer the view that the narrow approach is correct. The contractual scheme of the ESA informs its construction. Summary termination is a serious step and as noted above, is only open under the ESA in limited circumstances. The other provisions of cl 14 provide a range of steps that can be taken to terminate employment based on the type of conduct and on notice. If cl 19.2(f) were construed in the broader manner there would be serious consequences in that the scope of conduct potentially caught by its operation would be greatly expanded. Any breach of the ESA or breach of duty would potentially be caught as long as the sending of an email was involved. That construction does not sit with the other provisions of cl 14. For example, cl 14.1(b)(i) provides that even for a serious and persistent breach of the ESA there must be notice and an opportunity to remedy before termination. Clause 14.1(b)(iii) provides that even for termination for Gross Misconduct, there must be prior notice or payment in lieu.
The narrower view also reflects a consistent operation of cl 19.2. As in the case for each of cl 19.2(a) to (e), cl 19.2(f) qualifies the information itself.
Accordingly, for those reasons cl 19.2(f) is to be construed by requiring that the information itself be in breach of duty. I do not consider the emails relied upon sit within the terms of cl 19.2(f). Habitat was not entitled to terminate Mr Formby's employment summarily under cl 19.2(f).

Dismissal on notice for gross misconduct

Habitat also relies on cl 14.1(b)(iii): that is, that Mr Formby has committed Gross Misconduct as defined. Habitat asserts the following matters comprise Gross Misconduct:
(a)issuing the invoice for architectural work for the Mandurah apartments in the sum of $16,500 through his company FBY Global and causing that invoice to be paid by Habitat;
(b)establishing Hawk Crest in August 2015, arranging for it to enter into the building contract for the Mandurah apartments, using Habitat's resources and working in business hours to seek an overdraft for Habitat, meeting with Westpac, retaining Mr Bird and negotiating with him as proposed site manager, liaising with consultant building surveyors and preparing architectural drawings, seeking financial information and providing it to Westpac to assist in obtaining finance for Hawk Crest;
(c)failing to devote his whole time and attention to the business during normal business hours and taking numerous holidays without authorisation;
(d)making damaging comments to Mr Hodge in an effort to dissuade him from joining Habitat; and
(e)deleting 'his' emails from Habitat records and copying those of Ms Bradford immediately prior to his departure.

Relevance of definition - no notice

By its definition, an element of Gross Misconduct is that Habitat was required to provide notice to Mr Formby to rectify the particular default, and there must have been non‑compliance with that notice.
Habitat did not issue such notice. As a result, there has been no conduct falling within the definition of Gross Misconduct.
Habitat says that most of the facts that found the claim of Gross Misconduct were not known by it at the time of the termination, and so it could not have issued a seven day notice, and that even if it had done so, the result would have been no different.
With the exception of the invoice dispute and the allegation about excessive annual leave, I accept that Habitat had no knowledge of the conduct complained of prior to Mr Formby's departure (through Mr Pritchard or Ms Bradford or anyone else identified).
In Heugh v Central Petroleum Ltd [No 5], Le Miere J considered a similar notice requirement. The employee's conduct in instigating a private investigation of another employee comprised a serious breach that entitled his employer to terminate the contract if the breach was not remedied within 14 days notice specifying the breach. The employer had not issued a notice prior to termination. The employer contended that it had not known about the misconduct so that it could not have issued the notice, that the employee had failed to disclose his misconduct and should not have the benefit of his breach and that accordingly the notice provision should have no application.
That contention was rejected. A duty to cooperate so that parties have the benefit of their contract cannot be imposed in a manner which obliges a party to do something they are not obliged to do. An employee is not obliged to disclose their own breach of contract to the employer. Further, the principle of construction that a contract will be construed so far as possible so as not to permit one party to take advantage of their own wrong yields to the express terms of the contract. His Honour held that the contract expressly provides that the employer could only terminate if there is a failure to remedy after receiving notice. It could not be construed so as to provide that the employer could terminate the employee's employment without giving such notice.[370]
[370] Heugh v Central Petroleum Ltd [95] - [103].

His Honour also held that in any event the employer had prior notice of the serious misconduct, and so was treated as having waived any right to terminate for that breach.[371]
[371] Heugh v Central Petroleum Ltd [94], [105] - [107].
I respectfully follow Le Miere J's reasoning and in light of the absence of any seven day notice providing the opportunity to rectify the breach, find that there has been no Gross Misconduct and so no valid termination of Mr Formby's employment for Gross Misconduct.
However, in case I am wrong in my approach to notice, I will deal with the conduct relied upon by Habitat for the purpose of establishing Gross Misconduct.

Grounds - Gross Misconduct

Invoice for architecture

The background to the issue of the invoice is set out above under the heading 'Communications Formby to Westpac and Formby to Bird'. The fact that Mr Formby (by FBY Global) issued and was paid on an invoice to Habitat for work undertaken by him for the design for the Mandurah apartments was uncovered by Habitat and raised directly between Mr Formby and Mr Pritchard and between Mr Formby and Ms Bradford in July 2015.[372] I accept that Mr Pritchard did not know about the payment to Mr Formby until that time.[373] Ms Bradford assumed Mr Pritchard had agreed to the payment when she arranged it.[374] In effect, Mr Formby approved the payment to himself by asking Ms Bradford to pay it. Email exchanges between Mr Formby, Ms Bradford and Mr Pritchard in July 2015 are consistent with an acknowledgment by Mr Formby that the moneys would be repaid to Habitat. He makes suggestions as to how that might be done (including by invoicing a third party architect who would then pay Mr Formby, and he would then reimburse). He writes that he won't repay it 'as he can't.'[375]
[372] TB 136, 137, 138.
[373] Exhibit 5 [7].
[374] Exhibit 7 [86] - [90].
[375] TB 136, 137.
Under cross‑examination, Mr Formby said the fact he wrote that he could not pay it was only one reason for not paying it.[376] He said he was entitled to undertake the architectural work independently and was entitled to bill for it. He said he was not at Habitat to do architectural work.[377] He said he was 'pretty sure' he had raised the issue that he would be providing an invoice with Mr Pritchard. He accepted that if billed for architectural work and the third party billed for its architectural work, then Habitat's fees for stage one for the job would have in effect been exhausted.[378]
[376] ts 420.
[377] ts 433.
[378] ts 415.
Taking into account all the evidence, I do not accept Mr Formby's explanation. It is not consistent with the email exchanges of July 2015. I prefer to rely on those emails, which are also consistent with the evidence of Mr Pritchard and Ms Bradford. Mr Formby was a qualified architect and Habitat had provided architectural services for that job. Taking into account, those circumstances, I do not consider Mr Formby (or FBY Global) was entitled to retain the $16,500 payment. There was no agreement to retain FBY Global or Mr Formby personally to perform those architectural services.
However, Mr Formby's conduct in this regard cannot be relied upon for the purpose of termination for Gross Misconduct. The issue of the invoice was live between the parties well before the purported termination. I consider that Habitat waived its right to terminate for that conduct.

Activities for Hawk Crest

There was a range of conduct during the period August 2015 until (at least) December 2015 involving the establishment of Hawk Crest and exploitation of opportunities for Hawk Crest or Mr Formby personally at a time when he was a full time employee of Habitat.
Sometime during or prior to July 2015, Habitat held a strategy day. It was agreed that Habitat needed to focus on its strengths, being interior design and fitout. It was apparent at that time that Mr Formby had been interested in Habitat pursuing architectural and external construction work.
During July 2015, there were email exchanges between Mr Pritchard and Mr Formby about Mr Formby's desire to work on other projects. Mr Formby said he wanted an opportunity to give architecture and build jobs that came through to his mates and use his personal build ticket to take a cut of those projects. He said that 'eventually' he would like to step back from interiors and run an architecture/build business but, 'this won't be until a time that we have a comfortable sum of money in the account and the sales pipeline and sales process is feeding the system'.[379]
[379] TB 137.
Mr Pritchard responded, expressing the view that, for example, architecture fees were part of Habitat's revenue stream. He said that Mr Formby's request to focus on building and architectural projects was 'not in line with [Habitat's] core strategy'. He noted that he was supportive of Mr Formby moving onto such other things once Habitat's budget and cash flow were on track and it had recruited and developed sales and marketing resources that would allow Mr Formby to resign from a full time position. He said, 'Then if you want to invest your own time and resources into projects that make sense, you are absolutely free to do that'.[380]
[380] TB 137.
Mr Formby replied, saying, relevantly:[381]
(a)he agreed to focus 100% of his attention on interiors;
(b)he agreed to get the sales function to a point where he could comfortably exit the business development role;
(c)things he does in his spare time are his choice as long as they are not in conflict with Habitat interiors; and
(e)any future works once he exited the Habitat business development role using his architecture and construction experience and building ticket would be up to him.
[381] TB 137.
As those exchanges evidence, the expectation was that Mr Formby would focus on his sales and business development role and focus on interiors until the position of the company improved. Once he left that role, he might pursue other jobs.
Hawk Crest was established some two weeks later, in mid‑August 2015 and Mr Formby was its controlling mind. By mid‑September he was liaising with Mr Bird about arrangements between themselves for performing the contract. He apparently met Mr Turnbull for afternoon drinks during work hours to discuss banking arrangements for Hawk Crest.[382] He did not tell Mr Pritchard that he went ahead and secured the Mandurah apartments contract in the name of Hawk Crest. Architectural drawings dated December 2015 in the name of Hawk Crest were on the Habitat computer system.[383]
[382] TB 241.
[383] TB 156; ts 419 - 420; Exhibit 5[13].
Viewed collectively, I consider the conduct comprised a breach of Mr Formby's duties to the company. He utilised Habitat time to promote the interests of Hawk Crest and his own personal interests. He failed to focus properly on his duties to Habitat or its interests. However, in order to bring such breach within the definition of Gross Misconduct, the conduct must have the direct or indirect effect of causing damage or discredit to Habitat's business. Such damage or discredit has not been proven. Whilst the evidence shows that Mr Formby used some of his time to promote external interests when he should have been focusing on Habitat, Habitat has not established the requisite damage or discredit for the purpose of Gross Misconduct. The difficulty in establishing and proving any such damage is heightened by the fact that Mr Formby was absent from Habitat for many weeks (see below). It is not possible to infer that any damage in terms of lack of attention to Habitat was caused through the activities relating to Hawk Crest, as against by way of the other extended absences from the office.

Excessive annual leave

Mr Pritchard expressed concern about Mr Formby's absences from the business because the sales function was not performed when he was away. He raised the issue of holidays and time away. Whilst he acknowledged Mr Formby had a difficult year for personal reasons, he calculated that he had taken holidays for a period of 13 to 15 weeks in a nine month period. The issue about excessive leave was raised in writing in July 2015.[384] Mr Formby did not accept he had taken leave in the amounts claimed. He made some admissions to the effect he had taken some leave without notice.[385] Habitat knew about the leave issue for some time and did not act upon it. I consider that Habitat has waived its right to terminate for that conduct.[386]

Comments to Mr Hodge

[384] TB 135.

[385] TB 126.

[386] Heugh v Central Petroleum Ltd [105], [107].

As discussed above, I am not persuaded that Habitat has proved the allegation and this issue falls away. Mr Hodge did not give evidence.

Deleting 'his' emails from Habitat records

Mr Formby admitted that shortly before he left Habitat he deleted all of 'his' emails. He admitted they included emails he had sent as managing director of Habitat. He said he 'thought that it was okay to do [so]'. He accepted that Ms Bradford's emails were Habitat's emails.[387] The email was a company email account. It is a given that many business communications are done by email. Emails form an important part of the business records of a company. The conduct was a breach of Mr Formby's duties to Habitat.
[387] ts 439.
To the extent Mr Formby suggested he had implicit consent to delete or copy emails, I do not accept that evidence. First, to suggest a company would permit a director to delete the contents of his company email account is not credible. Second, there was conduct on the part of Mr Formby both before and after he left Habitat which indicates that he harboured a certain resentment towards Habitat or Mr Pritchard and was prepared to put his own interests above those of Habitat: for example, attempting to acquire Habitat's domain name; advertising in the name of Habitat Interiors on LinkedIn; setting up and promoting Hawk Crest by a website that utilised information from and about Habitat's clients, and was intended to undertake work including fitout work. Although some of those steps were thwarted, they indicate Mr Formby was quite willing to conduct himself without regard to Habitat's consent or the effect his conduct may have on Habitat.
The emails were restored. Although the restoration of emails was done by a consultant, there is no evidence as to any cost. Habitat has not proved damage or discredit as required for the purpose of Gross Misconduct.
In the circumstances, Habitat has not established conduct on the part of Mr Formby that comprised Gross Misconduct within the meaning of cl 14.2(iii).

Objections

The parties objected on the basis of relevance to many paragraphs in witness statements. To the extent I have referred in these reasons to paragraphs the subject of such objection, the evidence is relevant for the reasons apparent from my reference to it.[388] As to the balance paragraphs to which objection was taken and to which I have not referred, then the evidence is either irrelevant or did not play any significant part in my reasons.
[388] Exhibit 2 [203]; Exhibit 10 [49], [73], [174]; Exhibit 13 [23].

Conclusion

I have found that Mr Formby was bound by the restraint covenants in the areas of Perth and Melbourne for a period of 12 months from termination of the ESA. The reference to Perth and Melbourne is to their metropolitan areas. If I am wrong as to the restraint operating in Melbourne, that location can in any event be severed from the relevant clause, leaving the restraint enforceable in Perth.
I have found that some of Mr Formby's alleged breaches of the restraint covenants are established.
The distributions made to the shareholders of Habitat were loans, repayable in accordance with the terms of the Constitution. The second defendants' non‑payment of interest comprised a default and Habitat was entitled to call up the loan. Mr Formby is also liable to repay certain, but not all, of the personal expenses as claimed by Habitat.
Habitat was not entitled to terminate Mr Formby's employment under the ESA for Gross Misconduct or summarily under its terms. Outstanding entitlements to employee benefits are to be calculated taking into account that Mr Formby's salary was varied with effect from April 2015. Habitat's method of calculation of Mr Formby's outstanding salary is accepted but there will need to be some adjustments to take into account these reasons. The calculation of wages as prepared on behalf of Mr Formby is not accepted.
The resolution of any assessment of damages for breach of the restraint covenants will need to be programmed, together with the pleaded claims that have been deferred.
The parties should confer as to orders that reflect these reasons and costs.