Informax International Pty Ltd v Clarius Group Ltd
[2011] FCA 183
•4 March 2011
FEDERAL COURT OF AUSTRALIA
Informax International Pty Ltd v Clarius Group Limited [2011] FCA 183
Citation: Informax International Pty Ltd v Clarius Group Limited [2011] FCA 183 Parties: INFORMAX INTERNATIONAL PTY LTD and ISABEL MENANO-PIRES v CLARIUS GROUP LIMITED File number: NSD 594 of 2009 Judge: PERRAM J Date of judgment: 4 March 2011 Catchwords: CONTRACT – Independent Contractors Act 2006 (Cth) – harsh or unfair – whether restraint of trade clause harsh or unfair – application of Independent Contractors Act 2006 (Cth) to contracts terminated before application filed
CONTRACT – restraint of trade – enforceability – legitimate interest – customer connexion – opportunistic disintermediation – legitimate interest for labour hire firm – employer interest in staff or contractor connexion
CONTRACT – terms – entire contract or obligation – whether entire agreement term a warranty – whether breach of term
TRADE PRACTICES – misleading and deceptive conduct – representation in implied assertion – opinion – implied assertion as to breach of contract and validity of restraint of trade clause – whether opinion genuinely held
Legislation: Industrial Relations Act 1996 (NSW) s 106
Independent Contractors Act 2006 (Cth) ss 5(1), 12(1), 15
Restraints of Trade Act1976 (NSW) s 4(1)Trade Practices Act 1974 (Cth) s 52
Workplace Relations Act 1996 (Cth) ss127A, 127BCases cited: Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242 cited
Aerotek, Inc. v Burton 835 So 2d 197 (Ala. Civ. App, 2001) cited
Allied Express Transport Pty Ltd v Mears [2010] NSWSC 1112 citedAon Risk Services Australia Ltd v Australia National University (2009) 239 CLR 175 cited
Arthur Murray Dance Studios of Cleveland Inc v Witter 105 NE (2d) 685 (Ohio CP, 1951) cited
Aussie Home Loans v X Services (2005) ATPR 42-060 cited
Australian Securities and Investments Commission v Fortescue Metals Group [2011] FCAFC 19 cited
BHP Billiton Iron Ore Pty Ltd v National Competition Council (2007) 162 FCR 234 followed
Bridge v Deacons [1984] AC 705 cited
Butt v M’Donald (1896) 7 QLJ 68 cited
Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9 followed
Carter v New South Wales Rugby League Ltd (1997) 78 IR 368 cited
Columbus Medical Services, LLC v Thomas 308 S.W.3d 368 (Tenn.Ct.App, 2009) cited
Consultants & Designers, Inc v Butler Service Group, Inc 720 F 2d 1553 (11th Cir, 1983) cited
Daley v New South Wales Rugby League Ltd (1995) 78 IR 247 cited
Dalysmith Corporation (Aust) Pty Ltd v Cray Personnel Pty Ltd (unreported, Supreme Court of New South Wales, Young J, 14 April 1997) distinguished
Gerrard v Mayne Nickless Ltd (1996) 135 ALR 494 applied
Hanover Insurance Brokers Ltd v Schapiro [1994] IRLR 82 cited
Herbert Morris Ltd v Saxelby [1916] 1 AC 688 cited
Inn Leisure Industries Pty Ltd (Provisional liquidator appointed) v D F McCloy Pty Ltd (No 1) (1991) 28 FCR 151 cited
IRAF Pty Ltd v Graham [1982] 1 NSWLR 419 cited
John Fairfax Publications Pty Ltd v Birt [2006] NSWSC 995 cited
Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449 cited
Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1959] Ch 108 cited
Lindner v Murdock’s Garage (1950) 83 CLR 628 cited
Mackay v Dick (1881) 6 App Cas 251 cited
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 cited
Office Angels Ltd v Rainer-Thomas [1991] IRLR 214 cited
Orton v Melman [1981] 1 NSWLR 583 cited
Re Dingjan; ex parte Wagner (1995) 183 CLR 323 cited
RKR Dance Studios Inc v Makowski, Superior Court, judicial district of Hartford, Docket No CV 084035468 (46 Conn L Rptr 389) (September 12, 2008, Elgo J) cited
Saeed v Minister for Immigration & Citizenship (2010) 241 CLR 252 cited
Saeed v Minister for Immigration & Citizenship (2009) 176 FCR 53 cited
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 cited
Transport Tyre Sales Pty Ltd v Montana Tyres Rims and Tubes Pty Ltd (1999) 93 FCR 421 distinguished
Twenty-First Australia Inc v Shade (unreported, New South Wales Supreme Court, Young J, 31 July 1998) citedJ D Heydon “How Far Can Trial Courts and Intermediate Appellate Courts Develop the Law” (2009) 9(1) OUCLJ 1
J D Heydon The Restraint of Trade Doctrine (3rd Ed, 2008)
M Garrison and J Wendt “The Evolving Law of Employee Noncompete Agreements: Recent Trends and an Alternative Policy Approach” (2008) 45 Am Bus LJ 107
J Riley “No ‘poaching’ Why Not? A reflection on the legitimacy of post-employment restrictive covenants” (2005) 19(1) Comm Law Quarterly 3P J Sales “Covenants Restricting Recruitment of Employees and the Doctrine of Restraint of Trade” (1988) 104 LQR 600
Date of hearing: 5 – 7 July 2010, 29 July 2010 Date of last submissions: 3 August 2010 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 167 Counsel for the Applicants: Mr M Kimber SC with Mr N Furlan Solicitor for the Applicants: Harmers Workplace Lawyers Counsel for the Respondent: Mr A Moses SC with Mr Y Shariff Solicitor for the Respondent: Lander & Rogers
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 594 of 2009
BETWEEN: INFORMAX INTERNATIONAL PTY LTD
First Applicant / First Cross-RespondentISABEL MENANO-PIRES
Second Applicant / Second Cross-RespondentAND: CLARIUS GROUP LIMITED
Respondent and Cross-ApplicantJUDGE:
PERRAM J
DATE OF ORDER:
4 MARCH 2011
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order within fourteen days.
2.In the event of short minutes of order not being received within fourteen days the matter be relisted for directions.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 594 of 2009
BETWEEN: INFORMAX INTERNATIONAL PTY LTD
First Applicant / First Cross-RespondentISABEL MENANO-PIRES
Second Applicant / Second Cross-RespondentAND: CLARIUS GROUP LIMITED
Respondent and Cross-Applicant
JUDGE:
PERRAM J
DATE:
4 MARCH 2011
PLACE:
SYDNEY
REASONS FOR JUDGMENT
I
Introduction
Mrs Isabel Menano-Pires is an experienced information technology (“IT”) project manager. She holds a Bachelor of Science degree from Manchester University with honours and majored, in that degree, in computer science. She began working in the IT industry in 1981 and for nearly 20 years worked for a US based IT consultancy company, Computer Science Corporation. Between 1999 and 2006 she worked as an IT project manager successively for NRMA Ltd, IBM Australia Ltd, Commonwealth Bank of Australia Ltd and SingTel Optus Ltd which are all large corporations. The evidence before me suggests, and I accept, that Mrs Menano-Pires’ skills as an IT project manager are of a high order.
This case is about Mrs Menano-Pires’ relationship with a recruitment firm who specialises in the placement of IT contractors with large corporations (such as the ones for whom Mrs Menano-Pires had previously worked). That firm is the respondent. Although it is presently called the Clarius Group Ltd, it was, at the times relevant to this litigation, called Candle Australia Ltd. Because the parties have referred to it as Candle I will adopt the same convention. Candle is a large business. It was listed on the Australian Stock Exchange in 1997 (ASX Ticker CND) and remains listed. It provides recruitment services across the Asia Pacific region. Apart from those contractors whom it places in positions with its clients, it has more than 350 of its own staff located in major cities across the region such as Sydney, Melbourne, Hong Kong, Beijing and Singapore as well as many others. It operates across a number of sectors including the IT sector.
In February 2007, Candle was successful in placing Mrs Menano-Pires in a position as an IT project manager with the well-known grocer, Woolworths Ltd, on a temporary contract of 3 months duration. The project she was to manage was known within Woolworths as the centralised fuel price management project. As a matter of personal choice, Mrs Menano-Pires provided her services through a corporate vehicle known as Informax International Pty Ltd which was a company owned by Mrs Menano-Pires and her husband, Mr Jose Menano-Pires, and which I will call “Informax”. The formal provider of Mrs Menano-Pires’ services was Informax and, when she was engaged by a firm to do work, it was Informax which generally entered into the relevant contractual documentation.
Although Candle placed Mrs Menano-Pires in the project management position with Woolworths neither she nor Informax had any contract with Woolworths. The contract which existed was, instead, between Candle and Informax. The initial contract – there were subsequent extensions – commenced on 5 March 2007. The contract was in writing and contained a number of terms. Among the principal terms was a promise by Informax to Candle that it would provide the project management services of Mrs Menano-Pires to Woolworths until 1 June 2007. Another was the corresponding promise by Candle that it would pay Informax $792 per day for those services (which included an amount for GST).
The placement of Mrs Menano-Pires with Woolworths was by no means mere happenchance. Candle assiduously pursued the acquisition of clients who were large corporations with significant IT needs under long term labour supply agreements. These were known as “Preferred Supplier Agreements” (or “PSAs”). Under these long term arrangements Candle was able to secure large volumes of work through the continuous and on-going engagement of contractors. There was, in fact, a PSA in place between Candle and Woolworths of 3 years duration which commenced on 23 August 2006. To give some flavour of the size of these arrangements, it is worth noting that the PSAs for Candle’s four largest client accounts generated $54,737,841 in gross revenue for the period from 1 July 2009 to 14 April 2010. For the October to December 2008 quarter, Candle generated gross revenues of $615,174 from Woolworths.
Of course, these figures are gross figures and Candle was obliged to pass much of that revenue on to its own contractors (such as Informax). Its profit consisted of the margin it could charge clients, like Woolworths, on the cost to it of the labour it provided. In the case of labour provided under a PSA, the margins were typically in the range of 8%-13%. Labour provided under PSAs accounted for up to 65% of Candle’s business.
Mrs Menano-Pires’ work at Woolworths was a success. Having completed one project she was asked by Woolworths consecutively to work on a number of others, some of which were of considerable strategic importance to Woolworths. Of course, she was not herself retained by Woolworths for it looked to Candle to supply it with labour under the PSA. As each new project was assigned to Mrs Menano-Pires, arrangements were made to extend her contract with Candle.
This state of affairs continued for well over one year to the mutual benefit of all. However, by April 2008 it looked likely that there might not be any further projects for Mrs Menano-Pires to work upon. At the beginning of May 2008, she had a meeting with representatives of Candle and informed them of this impending work shortage. Candle’s representatives said they would look on her behalf for positions both inside and outside Woolworths. Importantly, however, they recognised that it was Mrs Menano-Pires who was the person who had the most developed project management contacts within Woolworths and, in light of that, they suggested to her, and she accepted, that she herself should look within Woolworths for a position.
There was thus sown the seeds of discontent and, with them, not a small degree of confusion. As a result of the meeting at the start of May 2008 Mrs Menano-Pires says she was left with the impression that if she could find a project management position within Woolworths then she could take it as her own without any further involvement from Candle. This view is not shared by Candle.
There remained some tidying up work for Mrs Menano-Pires to do under the existing arrangements with Candle until 30 June 2008. One final extension of her contract through to 30 June 2008 was approved to facilitate that work and this occurred on 4 June 2008. This contract was on the same terms, save as to its duration, as the initial contract which had been executed back on 5 March 2007.
Whilst her work for Woolworths ebbed to its end, Mrs Menano-Pires took steps within Woolworths to find other project management positions and these efforts were rewarded with success. Within Woolworths she had become acquainted with a Ms Zozobrado, who was a business account manager in the customer engagement department, and Ms Zozobrado was able to offer Mrs Menano-Pires a position as a project manager on a new project known as “Instant Rewards” which was a loyalty programme for Woolworths’ customers. When the question of pay arose, Mrs Menano-Pires told Ms Zozobrado that Woolworths had previously been paying Candle $900 per day for her services with which she would be happy but, and this is crucial:
We’ve got our own company set up. I work with Candle at the moment, but they did not find me this position and, as such, I’d rather work through our company for Instant Rewards.
On 16 June 2008, Ms Zozobrado confirmed to Mrs Menano-Pires that she had the position which was to be of three months duration. Mrs Menano-Pires’ work for Candle finished on 30 June 2008 and the following day she commenced working for (or, to be more accurate, Informax began providing her services to) Woolworths in a direct fashion and without the involvement of Candle. There is no dispute that she did not inform Candle of this development. A written contract was executed in July 2008. The effect of its terms was that it would last as long as there was in force a “service schedule” (cl 3.1(b)). There was only one service schedule, however, and this specified the work to be done on the Instant Rewards project. It expressly expired after 30 September 2008. Accordingly, Informax’s contract with Woolworths would come to an end on 1 October 2008 unless a further service schedule was executed before that time.
As had previously been the case, those within Woolworths for whom Mrs Menano-Pires was working were satisfied with her work. On 12 August 2008, she was offered a further project management position within Woolworths on a related project known as “Customer Analytics”. Towards the beginning of September 2008, Ms Zozobrado offered her yet a further expanded project management role dealing with a particular loyalty card operating only in Tasmania which Mrs Menano-Pires was content to accept. These additional roles were to be perfected by means of further “service schedules” which would take effect from 1 October 2008 and result in an extension of the agreement to 31 March 2009. Mrs Menano-Pires signalled her willingness to work on such terms on 17 September 2008. The service schedule giving effect to that extension had not yet been executed, however, when events took an unexpected turn.
Unknown to Mrs Menano-Pires there had been a serious development only two days before. It will be recalled that Mrs Menano-Pires had met with representatives of Candle in early May 2008 to discuss the diminishing amount of work remaining for her to do. One of those representatives was Ms Rachel Diduszko. Ms Diduszko was one of Candle’s account managers responsible for handling the Woolworths account. On 15 September 2008 – two days before Mrs Menano-Pires had told Woolworths she was happy to extend her contract with it to 31 March 2009 – Ms Diduszko had been at Woolworths’ corporate headquarters at 1 Woolworths Way, Bella Vista, which is in the north west of Sydney (and which was where Mrs Menano-Pires worked). Woolworths provided a number of on-site coffee shops for its staff and, on this day, Mrs Menano-Pires and another person were sitting in one of those shops around a table. This is known because Ms Diduszko, by chance, happened to see her there. Her impression was that some kind of meeting was taking place. Of course, so far as Candle knew, Mrs Menano-Pires had finished working for Woolworths on 30 June 2008.
This otherwise anodyne chance encounter was rendered more piquant by cl 4.4 of the contract between Informax and Candle. Because of its central importance to this case it is useful to set it out in full:
The Contractor and the Principal Person agrees that during the term of this Agreement and for a period of six (6) months after the termination of this Agreement, it shall not, either directly or indirectly through another organisation, do any of the following:
a)work for or be engaged by the Client, unless otherwise agreed to by Candle in writing;
b)employ or otherwise engage, or solicit or offer employment or other engagement to any employee or contractor of the Client or Candle; or
c)induce, solicit or entice or attempt to induce, solicit, or entice from Candle any of its clients.
d)solicit, interfere with, entice or cause to be enticed away from the Client, any existing customer of the Client.
The effect of cl 4.4(a), if valid, was to prevent Informax or Mrs Menano-Pires working for Woolworths until 1 January 2009. Ms Diduszko was aware of this restraint clause. After she saw Mrs Menano-Pires in the coffee shop, she rang the reception area at Woolworths and was told that Mrs Menano-Pires had both a telephone number and an email address at Woolworths. Further, more formal, communications then took place between Woolworths and Candle. Woolworths’ role in this affair arises because of the terms of the PSA between it and Candle which, like the contract between Candle and Informax, also contained a restraint clause. It was in cll 7.2 and 7.3 and was in these terms:
7.2 No Solicitation
Neither party nor any of its Related Bodies Corporate will directly or indirectly employ, engage, solicit or otherwise retain any person who is, or has been a Representative of the other party, to:
a)become an employee of the first party or any of its Related Bodies Corporate; or
b)provide services to the first party or any of its Related Bodies Corporate (whether directly or indirectly, including through a related, associated, subsidiary or labour hire company),
without the written consent of the other party.
7.3 Terms of obligation
The obligation in clause 7.2 (No solicitation) commences in respect of each Representative on the date the Representative first becomes directly involved in the
provision of the Services and ends 12 months after the Representative ceases to be directly involved in the provision of the Services.If effective, cl 7.2 bound Woolworths not to engage Informax or Mrs Menano-Pires for a period of 12 months which would have expired on 30 June 2009. Assuming, for the immediate sake of clarity only, that both cll 7.2 and 4.4 were valid, their effect was that it was a breach of the contract with Candle for Informax or Mrs Menano-Pires to work for Woolworths prior to 1 January 2009 and it was correspondingly a breach of the contract with Candle for Woolworths to engage Informax or Mrs Menano-Pires prior to 1 July 2009.
Following the initial communications between Candle and Woolworths, Mrs Menano-Pires had a meeting with the Woolworths IT Program Manager to whom she reported, a Mr Parbendra Singh, on 30 September 2008. In effect, he told her that if she wished to continue working for Woolworths she would need to do so through Candle. On the following day, he told her that she needed to resolve the situation and to speak with Candle. A telephone discussion between Ms Diduszko and Mrs Menano-Pires then ensued during which the former told the latter that she needed to work through Candle and that Woolworths was happy for this to occur. This was not satisfactory to Mrs Menano-Pires and this was conveyed to Candle. Sometime thereafter, but in any event on the same day, Mr Singh asked Mrs Menano-Pires to pack up her belongings and to leave Woolworths’ premises. Since the services schedule which would have extended Informax’s contract from 1 October 2008 to 31 March 2009 had not yet been executed, her initial contract had expired by effluxion of time at the end of the previous day, that is, at midnight on 30 September 2008. There was, therefore, no need for Woolworths to terminate her contract. Despite that, Woolworths purported to terminate the contract pursuant to an express power to do so on 14 October 2008. It is unlikely that this had any legal consequences since the contract had already ended pursuant to its own operation. In any event, the contract was at an end. Mrs Menano-Pires and Woolworths had parted company.
Mrs Menano-Pires is dissatisfied with this outcome and she and Informax now seek damages from Candle. The basis for this complex claim is as follows:
(a)cl 7.2 of the contract between Woolworths and Candle was an invalid restraint of trade and unenforceable. By hinting to Woolworths that it might be in breach of its contract with Candle in hiring Mrs Menano-Pires, Candle engaged in misleading and deceptive conduct contrary to s 52 of the Trade Practices Act 1974 (Cth) for it suggested both that cl 7.2 was valid and that Woolworths was in breach of that clause. But for that conduct Woolworths would have renewed Informax’s contract through to 31 March 2009 and there were prospects that it would have been further renewed into mid 2010.
(b)Candle had promised in cl 2.1 of its contract with Informax that that contract “constitutes the entire agreement for the supply of services by [Informax] to Candle”. Since cl 7.2 of the contract between Woolworths and Candle also regulated the supply of Informax’s services to Candle this clause had been breached. Without that breach, Informax would have continued working for Woolworths.
(c)The contract between Candle and Informax was “unfair” within the meaning of s 12(1) of the Independent Contractors Act 2006 (Cth) so that this Court’s jurisdiction to review it was enlivened. It is submitted to be unfair by Informax and Mrs Menano-Pires because they allege that Candle did not reveal the existence of the restraint clause in the contract between it and Woolworths to Mrs Menano-Pires. In essence, the argument is that because Mrs Menano-Pires was never told about that restraint clause it would be unfair for Candle to be able to achieve a superior result using it than that which it could achieve directly relying upon the restraint in cl 4.4 of the contract between Informax and Candle. This argument has the immediate weakness that cl 4.4 operated for a period of 6 months from 1 July 2008 to 31 December 2008 well-covering the period during which Candle approached Woolworths about Mrs Menano-Pires’ activities. For that reason, Informax and Mrs Menano-Pires must necessarily attack cl 4.4 which they do as follows:
(d)Cl 4.4 of the contract between Candle and Informax was an “unfair” provision within the meaning of s 12(1) of the Independent Contractors Act 2006. This was for four reasons:
(i)prior to her executing the contract with Candle Mrs Menano-Pires had been told by the person at Candle who recruited her, Ms Crystal Thomas, that the clause did not mean anything.
(ii)at the time Ms Thomas told Mrs Menano-Pires that the clause did not mean anything Ms Thomas had known that Woolworths was bound not to hire Mrs Menano-Pires under its contract with Candle. Holding back that information was an unfair tactic in negotiating the contract and the consequence was that cl 4.4 was unfair.
(iii)between 5 March 2007 and 4 June 2008 when the final extension of the contract between Candle and Informax was implemented, it was Mrs Menano-Pires who located all of the various project management roles within Woolworths and negotiated Candle’s (and her own) pay increases. In her submission, Candle had done nothing to find her any work within Woolworths and she had had to do it all herself. Further, she had been given the impression in early May 2008 by Ms Diduszko that since she had all the contacts within Woolworths she should go ahead and try to find a position for herself within Woolworths. It was unfair in those circumstances for her to be bound not to work for Woolworths until six months after the end of her engagement with Candle (on 30 June 2008).
(iv)The clause was, in any event, an invalid restraint of trade and that conclusion was an independent ground for finding it unfair.
(e)The measure of damages for all claims was the same. It was Informax’s lost income through to the end of 31 March 2009 together with amounts reflecting the possibility of further extensions of her contract. In all, more than $400,000 is claimed.
In addition to Informax’s claim, also before the Court is Candle’s cross-claim against Informax. It argues that Informax breached cl 4.4 of the contract between them by working for Woolworths and it seeks the margin it says it would have received during the three months that Mrs Menano-Pires worked directly for Woolworths, a sum totalling $4,959.90. Informax and Mrs Menano-Pires say that cl 4.4 is an invalid restraint of trade and that Candle has not proven that it would have been able to fill Mrs Menano-Pires’ position.
I have concluded that Mrs Menano-Pires was not told by Ms Thomas that cl 4.4 meant nothing. I have also concluded that she was not given the impression by Ms Diduszko that she should go ahead and try to find a position for herself within Woolworths. Despite rejecting these significant aspects of her evidence I have nevertheless concluded that Informax is entitled to succeed and that Candle’s cross-claim should be dismissed. At the heart of this case lies a series of questions about how the restraint of trade doctrine operates in the case of labour hire firms such as Candle. These questions are of some novelty in Australian law and are not easy. Although the applicants put their case on the bases set out above it is convenient to deal with all of the restraint of trade issues at the outset and then to apply the conclusions drawn to the balance of the issues. These reasons are, therefore, divided as follows: Part II deals with the restraint of trade doctrine, Part III with the claim under the Trade Practices Act 1974, Part IV with the claim in contract, Part V with the claim under the Independent Contractors Act 2006, Part VI with the quantification of damages, Part VII with Candle’s cross-claim and Part VIII with relief.
II
The restraint of trade doctrine and labour hire firms
Unusually, there are two restraint clauses at play in this case both of which have an impact on Informax and Mrs Menano-Pires. But they are contained in different contracts between different parties and this is significant. Cl 4.4 operates, if valid, to prevent Informax or Mrs Menano-Pires working for Woolworths for the six months after the cessation of their work for Candle. That six months commenced on 1 July 2008 and expired at the end of 31 December 2008. By contrast, cl 7.2 bound Woolworths not to engage the applicants for 12 months commencing on 1 July 2008 and ending on 30 June 2009. One was a covenant by a contractor binding itself not to work for one of the employer’s clients; the other, a covenant by a client not to engage a former contractor.
Both of these are plainly covenants in restraints of trade and we are not here, therefore, concerned with some of the controversies that at one time attended non-solicitation clauses. At common law, a restraint of trade is contrary to public policy and void unless it can be shown that the restraint is, in the particular circumstances of the case, a reasonable one: Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565 per Lord Macnaghten. Reasonableness, in that context, is to be judged having regard to the legitimate interests of the person in whose favour the restraint operates: Bridge v Deacons [1984] AC 705 at 714.
In this case, Candle submits that both clauses can be seen as reasonably protecting two quite distinct legitimate interests. The first is its interest in maintaining its customer connexion with Woolworths. Putting the matter broadly, it says that it goes to considerable ends to obtain clients such as Woolworths and it is legitimately entitled to protect itself against the risk of contractors placed with such clients exploiting the relationship thereby developed by poaching those clients from Candle.
The second interest is what Candle referred to as the interest in avoiding the risk of “opportunistic disintermediation,” that is, the middleman’s risk of being cut out.
There is no doubt that the first interest, that is, customer connexion, is a recognised category of legitimate interest for the purposes of the law concerning covenants which are in restraint of trade. However, the second interest in avoiding opportunistic disintermediation is not yet recognised in Australia. It being clear that the categories of legitimate interest are not closed (see J D Heydon, The Restraint of Trade Doctrine (3rd Ed, 2008) at 133) the question which arises is whether the interest should now be recognised. It is useful, however, to begin with the question of customer connexion and to return to opportunistic disintermediation afterwards.
Customer Connexion
One legitimate interest long accepted by the Courts is an employer’s interest in maintaining its connexion with its own customers against misappropriation by its employees or contractors: Lindner v Murdock’s Garage (1950) 83 CLR 628 at 633-634 per Latham CJ (Webb J agreeing at 647), 650 per Fullager J and 654 per Kitto J. In this context, I use the word employer to embrace also the situation involving the engagement of independent contractors.
An employer’s interest in protecting the connexion it has with its customers against diversion by its former employees does not extend to every employee. Few firms, for example, need to defend their client base from poaching at the instance of their former tea ladies or office boys. The guiding principle appears to be that a covenant to restrain a former employee from dealing with an employer’s clients will be supportable on the basis that it protects the employer’s customer connexions where there is “some element in the employee-customer relationship which causes customers to rely on the employee and to regard the employee as the business to the exclusion of the employer”: J D Heydon, The Restraint of Trade Doctrine (3rd ed, 2008) at 121. In that analysis, which involves real world questions, practical issues will naturally intrude such as the frequency of the contact between the employee and customer, the location at which the services are provided by the employee and, indeed, the nature of those services. Notions, too, of importance and seniority have their part to play.
The mechanical application of such tests should not, however, be permitted to obscure the mischief which the principle is designed to address which is the fact that there are employees whose position is such that they have the practical ability to control the business of their employer’s customers as if those customers were their own. It is against that particular risk that this doctrine is pitched and the various tests articulated in this area are all necessarily hewn to the end of identifying that risk in the case of particular employees. Where the risk is found to exist, however, an employer is entitled to be protected against it. The Restraint of Trade Doctrine quotes (at 122) Hoover J’s statement in Arthur Murray Dance Studios of Cleveland Inc v Witter 105 NE (2d) 685 at 706 (Ohio CP, 1951) that “the important thing is that the personal relation between the employee and the customer be such as to enable the employee to control the customer’s business as a personal asset” which I take to be to much the same effect. That statement has been referred to with approval in a number of decisions of Brereton J in the Supreme Court of New South Wales: Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449 at [34]; Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9 at [25]; John Fairfax Publications Pty Ltd v Birt [2006] NSWSC 995 at [30]; see also Twenty-First Australia Inc v Shade (unreported, New South Wales Supreme Court, Young J, 31 July 1998) at p 12. In RKR Dance Studios Inc v Makowski, Superior Court, judicial district of Hartford, Docket No CV 084035468 (46 Conn L Rptr 389) (September 12, 2008), Elgo J of the Superior Court of Connecticut described (at p. 9) the decision in Arthur Murray as “a tour de force exposition on the law of employment noncompete agreements” (citing M Garrison and J Wendt “The Evolving Law of Employee Noncompete Agreements: Recent Trends and an Alternative Policy Approach” (2008) 45 Am Bus LJ 107 at 124). The same question can be posed a different way by asking, as Brereton J did in Koops Martin at [34], whether the employee (in the extended sense) has become the “human face” of the employer with the client.
At least at a theoretical level there is no particular obstacle standing in the way of a conclusion that cl 4.4 may protect Candle’s interest in its customer connexion with Woolworths. This is because, if such an interest in fact exists, it is not difficult to see that it will justify some restraint on the ability of Informax and Mrs Menano-Pires to work with the former client.
However, whatever one might say about cl 4.4 of Informax’s contract I do not think that such an interest can conceivably sustain cl 7.2 of the Woolworths contract which, at least so far as this case is concerned, operates as a covenant by the client not to be poached. It is one thing to say that Candle’s interest in its customer connexion justifies a restraint on its staff or contractors eloping with Candle’s clients. It is another thing altogether to suggest that such an interest could justify a fetter on the client’s freedom to contract with whom it pleases. Of course, if Candle’s contract with Woolworths were an exclusive arrangement other notions might well intrude. But it is not such an arrangement and I do not see that any interest that Candle has in maintaining its client base against the blandishments of its former staff or contractors can justify a covenant binding the client itself not to leave Candle’s stable. It follows that I do not accept that any interest of Candle in its customer connexion with Woolworths can support cl 7.2 of the contract between them.
But what of cl 4.4 of the contract between Candle and Informax? Granted that such a clause can theoretically protect an interest in customer connexion, the question is whether such an interest exists on the facts of this case.
Candle’s simple submission at paragraphs 4.14 – 4.15 of its written submissions was that it had such an interest without any factual indication within the principles outlined above of why this might be so. In his oral submissions, however, Mr Moses SC, who appeared with Mr Shariff of counsel for the respondent, submitted that in the context of labour hire firms such an interest had been recognised by Young J in Dalysmith Corporation (Aust) Pty Ltd v Cray Personnel Pty Ltd (unreported, Supreme Court of New South Wales, 14 April 1997).
The submission made by Mr Kimber SC, who appeared with Mr Furlan of counsel for the applicants, was that the notion that customer connexion might justify a covenant in restraint of trade arose from cases concerned with protecting the goodwill of a purchaser under a contract for the purchase of a business. Caution should be exercised, so he submitted, in importing that concept into the field of employment covenants. In a supplementary written submission the applicants submitted that Dalysmith should be distinguished.
In my opinion, Dalysmith is of little assistance. I accept it stands for the proposition that a labour hire firm has a sufficient interest in its customer connexion to restrain a former employee from soliciting a former client. However, the conclusion in that case rested very much on the identity of the employees in question. Relevantly, for present purposes, neither of the employees restrained by Young J in Dalysmith were employees in the pool of blue collar workers maintained by the labour hire firm. They were, instead, full-time actual employees of the labour hire firm whose duties directly related to the business of placing staff. It is not difficult to see that a labour hire firm may well have a customer connexion interest viz à viz those of its staff who are directly involved in the business of placing persons in its employee placement pool with clients. But allowing that that might be so provides no warrant for drawing the broader, and somewhat distinct, conclusion that it has such an interest in relation to those of its employees or contractors who are in the pool from which placements to clients are made. The facts of Dalysmith bear this out. There the pool employees were blue collar workers and it would have been fanciful to suggest (and it was not suggested) that the labour hire firm could have restrained those employees from seeking positions with employers who happened to be on its books.
As I indicated above seniority has its role to play in this area but the real question in each case is the factual one of whether the particular employee or contractor has become the face of the employer to the client. In the case of labour hire firms that question can have no general answer and will depend in every case on the nature of the contractors in the pool, the manner of placement and the on-going tripartite relationship which then exists between contractor, client and labour hire firm. The factors must be assayed and exposed to the question which arises, namely, whether the contractor has been placed in a situation where it is likely that the client will identify the business of the labour hire firm with that of the contractor.
As the conclusion in Dalysmith very much rested on the identity of the employees, I do not accept that it provides any assistance to Candle in this case. In that regard it should be noted that Candle did not advance a separate argument that the facts showed that Mrs Menano-Pires had become Candle’s face to Woolworths so that, in accordance with principle, it had a legitimate interest in customer connexion. I would note for completeness, however, that there was some material before me which suggested that by reason of her position she might well have been afforded the opportunity to control Woolworths’ business as if it were her own.
For example by the time of the final renewal of the Informax contract on 4 June 2008, Mrs Menano-Pires had been on-site at Woolworths for 15 months (since 5 March 2007). She had worked, at a senior level, on a number of important projects within Woolworths. She had been paid initially $720 per day (excl. $GST) (and subsequently more) which was a considerable rate commensurate with the seniority of her position. By 4 June 2008, Mrs Menano-Pires knew how to enquire within Woolworths as to where there might be further work and, indeed, she did so. As a result of her various project management roles within Woolworths she was familiar with several managers inside the company and was well-regarded by them.
Further, after she started in March 2007, it became rapidly apparent that Candle had very little to do with the placement of Mrs Menano-Pires into further project management roles within Woolworths. After her initial placement by Candle on the centralised fuel price management project, it was Mrs Menano-Pires who thereafter procured her successive placements on other projects. As she came to the end of each project, it was Mrs Menano-Pires who was able to find, or was approached internally by Woolworths’ managers to work on, further projects. All of this she did by herself. Although Candle, from time to time, extended her contract with it to facilitate her continuing to work for Woolworths on these various fresh projects, it is apparent this was always as a response to steps which had already been taken by Mrs Menano-Pires to procure actual work inside Woolworths.
The nature of the relationship is well illustrated by a conversation which took place on 1 May 2008 between Mrs Menano-Pires and Ms Diduszko (a contractor care consultant, Ms Guyan, was also present). This conversation took place in the Woolworths cafeteria at Bella Vista. Both Mrs Menano-Pires and Ms Diduszko gave evidence about this conversation although their accounts are not precisely the same. It is clear, however, from both accounts that the discussion began by Ms Diduszko asking what it was that Mrs Menano-Pires was doing at Woolworths. Mrs Menano-Pires then explained the projects she was working upon and indicated that her time at Woolworths was nearly up and that she needed to find another position. Following further discussion – not presently material – Ms Diduszko said that it was Mrs Menano-Pires who had the inside knowledge at Woolworths and she should look around for a project management role. There is an additional question about this discussion which will need presently to be resolved (viz whether she was also told, or at least left with the impression, that if she found such a position she could take it without any further involvement on Candle’s part). For present purposes, however, the discussion amply shows that Mrs Menano-Pires and Candle both understood, prior to 4 June 2008 when the final extension to the contract was put in place, that it was Mrs Menano-Pires who was in the superior position to find work within Woolworths.
Observations such as those above might well be thought to provide a basis for concluding that Mrs Menano-Pires had become the face of Candle so far as Woolworths was concerned. That argument, however, was not put by Candle and the applicants have had no chance to respond to it. There may be several objections to the foregoing argument: by cl 4.1 of the agreement between Informax and Candle the former was not the latter’s agent; the service provided by Informax was IT project management but the service provided by Candle was the procurement of such services. To this there may be further answers – perhaps Mrs Menano-Pires took over Candle’s role of procuring IT services from Woolworths and thereby became its face independently of the terms of contract between Candle and Informax.
However, none of these questions can be answered because none of them was argued. I am bound to approach the matter on the basis that Candle’s case on this issue was that it had an interest in customer connexion only by reason of Dalysmith. For reasons already given, I reject that argument from which it follows that I must reject Candle’s argument that it had an interest in customer connexion sufficient to constitute a legitimate interest in supporting cl 4.4.
In those circumstances, it is not necessary to deal with the applicants’ suggestion that care should be exercised in applying notions of customer connexion in an employment contract. The contention appears, however, to be at odds with Lindner v Murdock’s Garage (1950) 83 CLR 628 and more recently with Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9 at [25] per Brereton J.
In those circumstances, I conclude that neither cl 7.2 of the contract between Woolworths and Candle nor cl 4.4 of the contract between Candle and Informax can be sustained by reference to any interest of Candle in its customer connexion with Woolworths. I turn then to the second interest relied upon by Candle – avoidance of opportunistic disintermediation.
Opportunistic Disintermediation
Candle submits that it goes to considerable lengths both to procure clients of the size of Woolworths and also to maintain a sufficiently large pool of appropriately qualified IT contractors to satisfy the needs of such clients. It contends that it is entitled to be rewarded for introducing its IT contractors to clients like Woolworths and so to recover the costs of providing a procurement service and with it a fair profit element. Accordingly, it had a legitimate interest, so it submits, in protecting itself against the loss of its duly earned reward which might well occur if its contractors were permitted immediately to deal with its clients. In effect, it characterises itself as an introduction agent (or perhaps as a labour broker) and points to the entitlement of such intermediaries to be rewarded for the introductory services they provide.
I was referred to no Australian authority which supports the notion that a covenant in restraint of trade may be sustained by reference to such an interest. Candle submits that I should follow a line of United States authorities which have as their ratio decidendi the acceptance of the existence of such an interest in the case of labour hire firms and of its ability to sustain covenants otherwise in restraint of trade. The applicants submitted that those authorities should not be followed in this country because they depended on the idea that an employer had a proprietary interest in its staff which was said to be inconsistent with English and Australian authorities denying that proposition.
The submissions of Candle should be preferred. The legitimate interest of a labour hire firm in avoiding the risk of opportunistic disintermediation was accepted by the Eleventh Circuit Court of Appeals in Consultants & Designers, Inc v Butler Service Group, Inc 720 F 2d 1553 (1983) where the Court (at 1558) said:
While in a technical sense the relationship between Butler and its job shoppers was employer-employee, this characterization of the relationship does more to obscure the relevant issues than to enlighten them. It is more revealing to recognize Butler’s role as that of the much maligned but time-honored middleman. Butler served as an intermediary in the market for highly-skilled, technically-trained workers. There were individuals seeking such employment and firms seeking to employ them.
…
In the market for the information in which Butler dealt, it had to compete with (1) all other technical services firms; (2) conventional employment agencies; and (3) disintermediation by firms and workers. Disintermediation is the actualization of the ever-present cry to eliminate the middleman, i.e., direct solicitation, negotiation and contracting between the firm and the worker. Eliminating the middleman is at first blush a facile and attractive alternative. However, middlemen exist because the provide a useful and highly valued service. If Butler’s covenant with its job shoppers is to have any justification, that justification must be to protect Butler’s role as a middleman in the market for information between job shoppers and client firms.
Once (1) a job shopper has been informed about a client and vice versa; (2) the shopper has expressed a desire to work for the client and vice versa; and (3) the employment has commenced and each is satisfied with the other, the primary mission of the technical service firm is complete. At that point barring some form of contractual constraint, the client firm and the job shopper could server their relationships with TSF and consummate a relationship with one another. The job shoppers and client firms could thereby opportunistically appropriate the work product of the TSF without paying it the full value of its services.
…
Therefore we conclude that Butler had a legitimate interest in protecting from opportunistic appropriation its investment in acquiring the information necessary to carry on its business, and that the covenant was reasonably well crafted to carry out that task.
The existence of the same interest, at least at the level of principle, was accepted by the Court of Civil Appeals of Alabama in Aerotek, Inc. v Burton 835 So 2d 197 at 203-204 (2001) and by the Tennessee Court of Appeals in Columbus Medical Services, LLC v Thomas 308 S.W.3d 368 at 389 (2009).
I reject the applicants’ submission that those decisions should not be followed in this country because they rest on the idea that a labour hire firm has a proprietary interest in a pool of employees per se and hence are inconsistent with Australian and English authority. The authorities were not identified but I take this submission to be at least a reference to the House of Lord’s decision in Herbert Morris Ltd v Saxelby [1916] 1 AC 688 and, in particular, Lord Shaw of Dunfermline’s statement (at 714) in these terms:
… a man’s aptitudes, his skill, his dexterity, his manual or mental ability – all those things which in sound philosophical language are not objective, but subjective – they may and they ought not to be relinquished by a servant; they are not his master’s property; they are his own property; they are himself.
Sentiments such as these have led some commentators to suggest that an employer has no sufficient proprietary interest in its employees to justify an agreement restricting competitive recruitment: see P J Sales “Covenants Restricting Recruitment of Employees and the Doctrine of Restraint of Trade” (1988) 104 LQR 600 at 611-612. As to whether that interest is adequate to justify a covenant restricting soliciting of present staff by a former employee there has been some debate. The conflicting views are set out in Office Angels Ltd v Rainer-Thomas [1991] IRLR 214 at 219 and Hanover Insurance Brokers Ltd v Schapiro [1994] IRLR 82 at 84; cf Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1959] Ch 108. Ms J Riley in her article “No ‘poaching’ Why Not? A reflection on the legitimacy of post-employment restrictive covenants” (2005) 19(1) Comm Law Quarterly 3 is clear that an employee’s traits – such as know-how, experience and skill – “do not ‘belong’ in any sense to the employer” (at p 5) and she therefore regards those authorities suggesting that an employer has an interest in a stable workforce as being “a very dangerous line of authority”. Without wishing to become embroiled in that debate unnecessarily it may be useful to observe that just as there is difference between ownership of the copyright in a book and ownership of copyright in individual words, so too there may be a real conceptual distinction between the notion that an employer might have interests in the arrangement of its staff as a whole and the notion that it has an interest in any particular employee.
Something similar, with respect, was I think recognised in Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9. In that case, Brereton J conducted an extensive review of the authorities and concluded, at 27, as follows:
… The employees, along with the suppliers and the customers make up the three relations upon which the profitability of a business depends. The customers are not property, but their connection with the business adds value to the business and is recognised as deserving of protection in the proprietor’s legitimate interest. Similarly, employees are not property, but, all else being equal, a business with a stable trained workforce will be more attractive to a purchaser and command a higher price than one with a workforce which is unstable, disruptive or poorly trained, just as a loyal and satisfied clientele makes a business more attractive and valuable. In my opinion, staff connection constitutes part of the intangible benefits, which may give a business value over and above the value of the assets employed in it, and thus comprises part of its goodwill. It is amenable to protection by a covenant in a manner similar to customer connection, even in the absence of protectable confidences.
Whilst it is true that White J did not go this far in Aussie Home Loans v X Services (2005) ATPR 42-060, preferring instead to recognise an interest in maintaining a stable workforce as arising from an employer’s entitlement to protect his or her confidential information in the identity and roles of its employees, nevertheless, the flow of authority in this country now supports the conclusion reached by Brereton J. I will not set out the authorities which have applied Cactus in this regard. It suffices to say that Bryson AJ thought the proposition for which it stands “well-established in New South Wales”: Allied Express Transport Pty Ltd v Mears [2010] NSWSC 1112 at [14].
The conclusion in Cactus that an employer has an interest in staff connexion formed part of the ratio decidendi of the decision. Because the principles at hand are common law ones Cactus is a statement about the common law of Australia. It follows that as a Court of co-ordinate jurisdiction I am bound to follow Cactus unless persuaded that it is “plainly wrong”: see, writing extra-curially, J D Heydon “How Far Can Trial Courts and Intermediate Appellate Courts Develop the Law” (2009) 9(1) OUCLJ 1 at 22-23.
I do not regard Cactus as plainly wrong. Indeed, with respect the analysis appears compelling. In any event, the judges of this Court are constrained (correctly in my opinion) in how they approach the “plainly wrong” test by two Full Court decisions which emphasise that it is satisfied only where it appears that the dispositive adjudication of the controversy has, in some way, miscarried: BHP Billiton Iron Ore Pty Ltd v National Competition Council (2007) 162 FCR 234 at [83]-[84] per Greenwood J (with whom Sundberg J agreed). At [83] Greenwood J gives examples of instances in which a co-ordinate decision might be regarded as plainly wrong:
The circumstances in which a judge in the exercise of the Court’s original jurisdiction might find a decision of a single judge of the Court to be ‘plainly wrong’ should be approached with real and deliberative caution and would generally involve that class of case where for one reason or another there is transparent error such as the consideration of an incorrect statutory instrument in the resolution of the controversy; consideration of a provision of a statute in a form not enacted at the relevant date of the events or a failure to consider a provision of an Act relevant to the disposition of the cause, thus causing the analysis to fall into error; a failure to apply having regard to the issues raised by the controversy, a binding decision of a Full Court of this Court or the High Court; a failure to apply a decision of a Full Court of this Court, an intermediate Court of Appeal of another jurisdiction or an authority of the High Court expressing a clear persuasive emphasis of opinion in favour of a particular conclusion (particularly concerning legislation of the Commonwealth Parliament); or some other circumstance that has caused a dispositive adjudication of the controversy to miscarry.
The last sentence was picked up with apparent approval by Heydon J in the article referred to above at p 25. The approach necessarily dictates that mere disagreement with a decision of a court of co-ordinate authority will not suffice. The list of examples of reasoning which was “plainly wrong” given by Greenwood J, with its emphasis on the miscarriage of the adjudicative process, demonstrates that once a matter of law is determined at one level of the judiciary, it is to be applied at that level regardless of individual judge’s views about the matter for the “plainly wrong” test is not satisfied by the demonstration to a judge that the decision in question is “wrong”. As Greenwood J said in BHP Billiton at [84]:
That minds might differ on a question is not a foundation for a conclusion that a decision supported by exposed reasons for judgment after full argument, is plainly wrong.
This approach was applied by another Full Court in Saeed v Minister for Immigration & Citizenship (2009) 176 FCR 53 at [44] per Spender, Buchanan and Logan JJ. Although the decision was reversed on appeal by the High Court (Saeed v Minister for Immigration & Citizenship (2010) 241 CLR 252) this aspect of the Full Court’s reasoning was not. The consequence of BHP Billiton and Saeed is that I am bound to proceed upon the basis that “plainly wrong” means more than mere, or even strong disagreement with, the decision in question – it requires an actual conclusion that the reasoning process has miscarried.
I do not regard Cactus as plainly wrong in that sense (or even wrong at all). It follows that I am bound to follow it. Consequently, I am bound to reject the applicants’ argument that Australian law does not recognise any form of proprietary interest in the arrangement of employees or contractors. In that circumstance, I can see no other reason not to follow the United States authorities on the question of whether the disintermediation interest exists. I conclude, therefore, that a labour hire firm has a legitimate interest in protecting itself against the perils of opportunistic disintermediation.
That, however, is not the end of the matter. The interest involved is an interest in recouping expenditure together perhaps with a profit component or, to put it slightly differently, it is an interest in being permitted profitably to charge for the introduction of the contractor to the client. Whether such an interest actually exists in this particular case inevitably directs attention to the nature of Candle’s business.
Candle led evidence about its business from its chief operating officer, Ms Quick. Her evidence was concerned with Candle’s current practices but it was not suggested that her explanation of the business did not apply at the time the contract between Woolworths and Candle came into existence and I proceed on the assumption that it did. Such evidence is probative: Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242 at 286.
Mention has already been made of the fact that about 65% of Candle’s business comes through PSA arrangements. Ms Quick gave evidence of the considerable efforts which went into procuring clients under PSA arrangements. Usually these resulted from a tender process which involved a careful assessment of matters such as likely future volume, margin and profitability. Sometimes in excess of 100 hours of staff time might be required to prepare such a tender. If a PSA was secured there were then substantial costs in its administration. The largest of these were staff costs. Two types of employees were involved: these were, at one end, account managers who liaised with the relevant client and arranged the placement of appropriate contractors; and, at the other end, consultants who were assigned to look after the interests of the contractors. The rationale behind that approach was the need to maintain a pool of contractors who were readily available to meet the demands of the clients.
Ms Quick gave evidence that the costs of the tender process and those of administering the PSA after its formation were overheads in its business. She gave evidence that unless the PSAs were exclusive to Candle or at least placed Candle on a preferred basis there was no point incurring these expenses which would not be recouped.
At the same time, the maintenance of the pool of contractors was an important aspect of Candle’s business which necessarily depended on an ability rapidly to be able to service the needs of its clients. Thus significant expenditure was incurred in finding appropriate contractors to be placed in the pool, satisfying the needs of those contractors (to encourage them to stay in the pool) and keeping track, in an orderly way, of the skill set that the pool contained. Ms Quick gave evidence that Candle’s single largest cost was the on-going maintenance of its contractor database which required a substantial workforce of recruiters and contractor care consultants together with attendant infrastructure and advertising costs.
I accept all of this evidence which shows that Candle did put considerable economic effort into arranging the placement of contractors with its clients. But the evidence led did not descend to the level of explaining what the value of this effort was, what Candle’s profits were or how much of its investment had been recouped following Mrs Menano-Pires’ fifteen month placement with Woolworths. Unlike the interest in customer connexion which may be thought, in many cases, to be one which grows more substantial the longer the employee works with the client, the interest in avoiding the loss of the ability to recoup a business expense is likely to diminish as time passes and less and less remains to be recouped. There are some very subtle issues here but I do not need to explore them. Section 4(1) of the Restraints of Trade Act 1976 (NSW) means that cl 4.4 is valid to the extent that it is not against public policy in respect of restraint of trade. The established operation of s 4(1) requires me, inter alia, to ask whether at the critical time cl 4.4 was effective: Orton v Melman [1981] 1 NSWLR 583 at 587-588 per McLelland J. That time is the period between the time at which Ms Diduszko first contacted Woolworths about her discovery that Mrs Menano-Pires was still working at Woolworths, on 17 September 2008, through to the time Mrs Menano-Pires was asked to leave Woolworths’ premises on 1 October 2008.
The question then is whether cl 4.4 was effective during that two week period. Candle bears the onus of proving that its interest in not being disintermediated required, during that period, that Mrs Menano-Pires not be permitted to work for Woolworths. Contrary to the submissions of the applicants I do not think that it is correct that the interest in avoiding disintermediation should be protected only by requiring the payment of a fee (although I accept that it may be protected in that way). I see no particular difficulty, for example, with the recovery of the employer’s investment in the business arrangements which bring client and contractor together occurring over time by instalments. And, if that be so, there may be little objection to protecting the payment of those instalments (if taken out of the fees charged to the client for the contractor’s services) by preventing contractor and client dealing until the recoupment of the investment is complete. If such an arrangement can work there may well be some ability to protect its efficacy with a restraint clause.
Accordingly, relief should be confined to those two contracts. The applicants submitted that two kinds of variation should be ordered:
·the insertion of terms into the contract by which Candle promised not to seek to enforce directly or indirectly the restraints in the contract between Candle and Woolworths.
·an indemnity against any breach of those fresh terms.
I see no reason to impose an indemnity whose absence from the contract causes no harshness or unfairness. In principle, subject to one matter, a provision dealing with the restraint in the two contracts between Woolworths and Candle along the lines suggested by the applicants should be inserted. That one matter is this: all that has been established is the unfairness of the two contracts in permitting Candle to take the steps which it did between 17 September 2008 and 1 October 2008. I do not see that any protection after 1 October 2008 is relevant or, indeed, required.
In those circumstances the contracts between Candle and Informax of 31 May 2008 and 4 June 2008 should be varied by the addition of the following terms (which are largely based on those put forward by the applicants):
14.Candle will not take any step to enforce any provision in any contract between Candle and the Client, the purpose or likely effect of which would be (in whole or in part) to fetter, restrain or otherwise impede the Contractor or the Principal Person from being directly or indirectly engaged by the Client during the period of 17 September 2008 to 1 October 2008 (being a period after the expiry of this agreement) including any restraint provision that exists before the formation of this agreement.
15.Candle will not procure or encourage the taking of any step by the Client to enforce a provision of the kind referred to in clause 14.
Part nine: pleading amendments
At prayer 7 of their further amended application the applicants seek leave further to amend their proceedings in the event that relief is granted under s 12 of the Independent Contractors Act.
Candle submits that this course should not be taken because:
(a)no order was made permitting the bifurcation of the trial; and
(b)any amendment would be contrary to the principles in Aon Risk Services Australia Ltd v Australia National University (2009) 239 CLR 175.
It also submits that what the applicants effectively now wish to pursue is a claim for damages for retrospective breach of a retrospectively varied contract. It is said that this will give rise to complex issues.
At this stage, I think the appropriate course is to permit the parties to digest these reasons and for the applicants to make any application to amend their proceeding by notice of motion. The question of whether leave should be granted can then properly be ventilated.
VI
Assessment of damages
Whilst it would be possible to assess, in the alternative, damages for the claim under the Trade Practices Act and for the breach of contract I do not think it is appropriate to do so until the question of whether there is to be any amendment to the pleadings is finalised.
VII
Candle’s Cross-Claim
Candle claimed its margin for the three months that Informax worked directly for Woolworths on the basis that Informax had been in breach of cl 4.4. Since I have concluded that cl 4.4 was not enforceable during the period 17 September 2008 to 1 October 2008 the cross-claim should be dismissed insofar as it relates to that period. The same reasoning also supports the proposition that it has not been shown to be enforceable in the period 1 July 2008 to 16 September 2008 (that is, neither customer connexion nor disintermediation interests have been established). The cross-claim must, therefore, be dismissed with costs.
In the event that my conclusions about cl 4.4 are reversed I would assess Candle’s damages as follows. Informax submitted (if cl 4.4 were valid) that Candle had not proven that it would have been able to place a consultant in the position previously filled by Mrs Menano-Pires. I reject this argument. The award of damages in contract seeks to put the party claiming damages in the position it would have been in if the breach had not occurred and instead the promise had been performed. What would have happened (on this hypothesis) if Informax had not breached cl 4.4? If Informax had honoured its obligations under cl 4.4 Mrs Menano-Pires would have realised she could not work directly for Woolworths. Just as Ms Diduszko had suggested to her on 1 May 2008, she would have used her contacts within Woolworths to find the position through Ms Zozobrado that she did, in fact, find and she would have been placed in that position by Candle. The alternative is that she would have done nothing, preferring no employment at all. Mrs Menano-Pires is an active person and did not strike me as the kind of woman who would prefer to do nothing. Accordingly, I conclude that Candle would have succeeded in filling the position in question with Mrs Menano-Pires.
The amount paid to Informax under its final contract with Candle was $780 per day. The amount paid by Woolworths to Informax under its direct contract was $900 per day. The difference was $120 per day. Candle accepted that it incurred expenses of $44.85 per day. Accordingly, it would have been entitled to $75.15 per day which amounts to $4,959.90 for the period 1 July 2008 to 30 September 2008.
VIII
Relief
The parties are to bring in short minutes of order within fourteen days. In the event that this does not occur the matter will be relisted for further directions.
I certify that the preceding one hundred and sixty-seven (167) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram. Associate:
Dated: 4 March 2011
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