Label Manufacturers Australia Pty Ltd v Chatzopoulos

[2022] NSWSC 1059

Supreme Court

New South Wales

Medium Neutral Citation:

Label Manufacturers Australia Pty Ltd v Chatzopoulos [2022] NSWSC 1059

Hearing dates:

26, 29 July 2022

Date of orders:

29 July 2022

Decision date:

06 September 2022

Jurisdiction:

Equity - Expedition List

Before:

Parker J

Decision:

See [155]

Catchwords:

RESTRAINT OF TRADE – executive employee – restraint against being “involved” with any business competing with or similar to the defendant – restraint against solicitation of customers or potential customers and suppliers and potential suppliers of the defendant – reasonableness – restraint sought against Victorian defendant working in Victoria – application of Restraints of Trade Act 1976 (NSW)

EMPLOYMENT LAW – contract – employment transferred to different entity – whether employment restraints also transferred

Legislation Cited:

Corporations Act 2001, s 9

Restraints of Trade Act 1976, s 2

Cases Cited:

Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242

Aussie Home Loans v X Inc Services [2005] NSWSC 285

Belflora Pty Ltd v Vinflora Pty Ltd (2021) 106 NSWLR 67

Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9

Emeco International Pty Ltd v O'Shea (No 2) (2012) 225 IR 423

General Billposting v Atkinson [1909] AC 118

Haynes v Doman [1899] 2 Ch 13

Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343

John Fairfax Publications Pty Limited v Birt [2006] NSWSC 995

KA & C Smith Pty Ltd v Ward (1998) 45 NSWLR 702

Kay's Leasing Corporation Pty Ltd v Fletcher (1964) 116 CLR 124

Lindner v Murdock’s Garage (1950) 83 CLR 628

Pearson v HRX Holdings Pty Ltd (2012) 205 FCR 187

Putsman v Taylor [1927] 1 KB 637

Re Rinehart (2020) 104 NSWLR 274

S W Strange Ltd v Mann [1965] 1 WLR 629

Sidameneo (No 456) Pty Ltd v Alexander [2011] NSWCA 418

Tullett Prebon (Aust) Pty Ltd v Purcell [2008] NSWSC 852

Wanganui-Rangitikei Electric Power Board v Australian Mutual Provident Society (1934) 50 CLR 581

Category:

Principal judgment

Parties:

Label Manufacturers Australia Pty Limited (Plaintiff)
Jim Chatzopoulos (Defendant)

Representation:

Counsel:
A Guy (Plaintiff)
CP O’Neill (Defendant)

Solicitors:
Vincent Young (Plaintiff)
Macpherson Kelley Pty Limited (Defendant)

File Number(s):

2022/202453

Publication restriction:

Nil

Judgment

1. This a restraint of trade case. The plaintiff, Label Manufacturers Australia Pty Limited (“LMA”), seeks injunctions to enforce covenants in a former employee’s employment contract. Those restraints would, if fully enforceable, apply until December next year to prevent the employee from undertaking work of the type undertaken in his employment with the plaintiff.

2. I heard LMA’s injunction claim on 26 and 29 July. In view of the urgency of the proceedings, on 29 July I made orders dealing with the claim. This judgment sets out the reasons for the conclusion I reached on 29 July that the claim should be dismissed, essentially because LMA had failed to establish the reasonableness of the restraints (see [95]-[144] below). The judgment incorporates some supplementary research undertaken in the course of its preparation which has reinforced that conclusion.

3. There was a question in the proceedings about the incorporation of the covenants into the employment contract. In the light of my conclusion about reasonableness, the decision on that question did not affect the outcome, and on 29 July I had not reached a final decision on it. I have now dealt with the question in the judgment (at [87]-[94] below).

4. The defendant in the proceedings, Jim Chatzopoulos, is also known as Jim Chatz. Mr Chatzopoulos was employed by LMA as its Chief Executive Officer (CEO). LMA conducts a business of manufacturing and supplying self-adhesive labels for trade customers.

5. Mr Chatzopoulos began his employment with LMA in March 2018. Prior to that he worked as CEO of another company in the same corporate group, TMA Australia Pty Limited (“TMAA”), which then conducted the adhesive label business. Mr Chatzopoulos started work with TMAA in February 2017.

6. Mr Chatzopoulos was made redundant by LMA in June last year, and was placed on “gardening leave”. His employment formally ended in December last year.

7. In May this year, Mr Chatzopoulos negotiated new employment as the managing director of a company called Reflex Labels & Packaging Asia Pacific Pty Limited (“Reflex Asia Pacific”). As its name suggests, that company’s business competes with LMA’s. The proceedings began when Mr Chatzopoulos foreshadowed to LMA that he proposed to take up that new employment.

Claims for determination

8. There were three restraints which LMA sought to enforce in the proceedings. One would have prevented Mr Chatzopoulos from being “involved” with any business which competed with, or was similar to, that of LMA. The second would have prevented him from soliciting customers of, or suppliers to, or prospective customers of, or prospective suppliers to, LMA. The third restraint applied to the solicitation of LMA’s employees.

9. At their most extensive, the restraints which LMA sought to enforce would have operated until two years after the termination of Mr Chatzopoulos’ employment (that is, until December 2023). They would have applied in North America, Europe, and much of the Asia-Pacific region including China, Japan, Australia and New Zealand.

10. The relevant restraints were recorded as covenants in a formal employment contract between TMAA and Mr Chatzopoulos which dates from when Mr Chatzopoulos started work with TMAA in February 2017. When Mr Chatzopoulos’ employment was transferred from TMAA to LMA in 2018, Mr Chatzopoulos counter-signed a letter setting out terms for the transfer. LMA contended that the effect of the letter was to pick up the covenants recorded in Mr Chatzopoulos’ formal employment contract with TMAA. Mr Chatzopoulos disputed this. The question is one of construction of the letter agreement.

11. If enforceable by LMA, the covenants undoubtedly operate in restraint of trade. This means that they are void except to the extent that they are reasonably necessary to protect LMA’s interests. The parties were at issue on this question.

12. A related question was whether, to the extent that the restraints might extend beyond what was reasonable, more limited versions of the restraints could still be enforced. The restraints were, at least to some extent, drafted so as to accommodate the “blue pencil” severance of restraints which might prove invalid at common law. Both the time period of the restraint and the geographical area covered by them were expressed as a series of alternatives so that, if the most extensive restraint were found by the Court to be unreasonable, an alternative, less extensive, restraint would come into play. But not all of the complaints about the reasonableness of the restraints were capable of being dealt with by severance of this type.

13. The Restraints of Trade Act 1976 (to which I will refer as “the Act”) provides that if a restraint goes too far to be reasonable, it can be enforced to the extent that it is reasonable. The restraint does not need to be in severable form. But there was a question about whether the Act applied in this case.

14. The original written contract between TMAA and Mr Chatzopoulos expressly provided that the contract was governed by the law of New South Wales. But Mr Chatzopoulos lives and works in Victoria, where there is no equivalent to the Act and restraint of trade is governed by common law rules. His contention was that the choice of law clause was not picked up by the letter agreement, and that the proper law of his employment contract with LMA, as constituted by the letter agreement, was that of Victoria. If this was correct then the provisions of the Act were not available.

15. Some of the evidence filed on behalf of LMA suggested Mr Chatzopoulos had made, or may have made, unauthorised use of confidential information at or after the time he was given notice of termination of his employment. But this was not pursued at the hearing. No relief for breach of confidence, or apprehended breach of confidence, was claimed.

16. An interlocutory regime was agreed between the parties. Upon LMA giving the usual undertaking as to damages, Mr Chatzopoulos undertook that, until final determination of the proceedings, or further order, he would not accept employment in the printing and labelling industry; and that he would comply with selected covenants in the employment contract between himself and TMAA. LMA undertook that if the proceedings were not determined before 1 August, it would pay an amount equivalent to Mr Chatzopoulos’ salary with Reflex Asia Pacific into Court.

17. The proceedings were conducted on an expedited basis. LMA’s summons was filed on 11 July. Pleadings were not required. The case was run economically and co-operatively, which enabled the final hearing to take place within a matter of weeks of the proceedings being commenced.

Summary and analysis of evidence

Chronology of key events

18. LMA and TMAA are both wholly-owned subsidiaries of an unlisted public company called The TMA Group of Companies Australia Limited (“TMA Group”). TMA Group appears to be controlled by Mr Anthony Karam, and his sister, Ms Corriene Karam. It functions as a holding company for several subsidiaries engaged in different businesses or ventures.

19. The board of TMA Group consists of Mr Karam, Ms Karam and a Mr Tony Saad. Mr Karam is the Group’s Chief Executive. Ms Karam is the Group’s Chief Operating Officer and Chief Financial Officer. Managers working for the various subsidiaries report directly to the Karams.

20. One of TMA Group’s businesses is the manufacture and supply of self-adhesive labels. In 2016 (which is when the story begins for the purposes of these proceedings) that business was conducted through TMAA. It operated from factory premises in Sydney, which is also where TMA Group is headquartered.

21. Mr Chatzopoulos has worked in the self-adhesive label industry since 1995. The dealings between the parties which led to his employment by TMAA began in September 2016. At the time, Mr Chatzopoulos was working as the Australian and New Zealand Business Manager in another self-adhesive label business which was being conducted by a company called Labelmakers Pty Limited (“Labelmakers”). According to Mr Chatzopoulos he was not satisfied with his level of responsibilities. It seems that there was also some dissatisfaction within Labelmakers about Mr Chatzopoulos’ performance as Business Manager.

22. At the time, one of TMA Group’s divisions was a supplier to Labelmakers. As a result of this, Mr Karam and Mr Chatzopoulos knew each other. There is some disagreement about who first suggested it, but between them they discussed the idea of Mr Chatzopoulos leaving Labelmakers and coming to TMA Group to run its self-adhesive label business. They reached agreement, and on 21 October Mr Chatzopoulos signed a formal employment agreement with TMAA.

23. The self-adhesive label business essentially involves producing and delivering labels to customers in accordance with their requirements. Sometimes the manufacturer will undertake, or be involved with, the design of the label. The main raw materials are specialised papers and inks used in producing the labels. The production processes themselves are not patented nor do they involve any trade secrets.

24. The prices received by manufacturers, and the amounts they pay their suppliers, are, of course, not usually public knowledge. But according to Mr Chatzopoulos these contract prices and supply prices tend to fluctuate in accordance with fluctuations in commodity prices and exchange rates. He stated that such information would not retain its currency for more than six months or so at the most. His evidence on this subject was not challenged.

25. The state of the industry at the time Mr Chatzopoulos agreed to work for TMAA was described in the position paper prepared by Mr Chatzopoulos to which I refer below. Demand for labels was expanding and printing and labelling technology was improving. But there was excess capacity in the industry which stood to increase as improved equipment was adopted. This, and more competitive tendering, was resulting in margin pressure. The improved printing and labelling technology also required a more skilled workforce.

26. According to the position paper, the Australian and New Zealand market was then worth $828 million in annual sales. The position paper identified the top seven label manufacturers as between them holding 60 per cent of the market; the individual market shares of these seven manufacturers ranged from 20 per cent down to 3 per cent. Between them, the other participants in the market held the other 40 per cent.

27. Mr Chatzopoulos presented a picture of a highly competitive, and fragmented, industry. According to the affidavit, there were about 240 manufacturers in total, which meant that more than 230 shared the residual 40 per cent of the market. According to the position paper, there were 25 companies in the industry with sales of $5 million or more. Small and medium operations were finding it difficult to maintain margins and compete. Consolidation was likely and, indeed, was already underway.

28. Mr Chatzopoulos’ description of the market in his position paper and in his affidavit was not disputed. Mr Karam characterised the market as a competitive one which was dominated by the top five or six manufacturers.

29. The position paper contained a breakdown of annual sales into nine sectors. These sectors were, ranked from highest to lowest sales value: food and beverage; wine; logistics transport and industrial; retail; promotional and specialty applications; office and home; cosmetics; pharmacy; and techno-chemicals. In his affidavit, Mr Chatzopoulos described the sectors somewhat differently, identifying them as: transport and logistics; warehousing and distribution; retail; food processing and manufacturing; fast moving consumer goods; beverages; and milk and dairy products.

30. According to Mr Chatzopoulos, TMA Group had a significant presence in baggage labels and tickets for the airline industry. TMA Group also supplied some retailers and a significant customer in the beverage sector. But overall, its position in the market was minor. According to Mr Chatzopoulos, in 2016 it was ranked thirteenth. On the figures in the position paper, that would have given it less than 3 per cent of the market.

31. As events unfolded, Mr Chatzopoulos’ employment by TMAA coincided with the adoption by TMA Group of a plan for a major expansion in its label business. The plan included the construction of a new label factory in Melbourne. It seems likely that this was in Mr Karam’s mind before he agreed to employ Mr Chatzopoulos, but the evidence did not address this. What is clear is that as Chief Executive Officer of TMAA Mr Chatzopoulos spearheaded the detailed formulation of the plan and its implementation.

32. It was also contemplated during the negotiations between Mr Karam and Mr Chatzopoulos that in due course the expanded label business, under Mr Chatzopoulos’ management, would be established within a separate subsidiary in the TMA Group. This was the subject of a side letter dated 21 October from Mr Karam (on the letterhead of TMAA) to Mr Chatzopoulos. This was three days after Mr Chatzopoulos signed his employment contract.

33. The letter recorded that TMAA, “or a related entity”, currently intended to set up such a separate company. It stated that, subject to the company being established, and Mr Chatzopoulos continuing to be employed by TMAA, it was intended for his employment to be transferred to the new company. Mr Chatzopoulos would also be entitled to participate in an incentive plan entitling him to a 2 per cent share of the new company’s earnings before interest and tax (“EBIT”), in accordance with incentive plan terms to be agreed.

34. It seems that Mr Chatzopoulos began work on the plan as soon as he had agreed to take up employment with TMA Group. Mr Chatzopoulos helped Mr Karam with identifying a suitable location for the proposed Melbourne production facility. He also seems to have been involved in recruiting staff for the expanded business.

35. Mr Chatzopoulos also went on to prepare a position paper setting out a “business plan” for TMA Group’s adhesive label business for 2017 to 2021. The position paper outlined a detailed description of the planned expansion of the business. The paper was dated November 2016 and was presented by Mr Chatzopoulos to the board of TMA Group, which appears to have adopted it (Mr Karam said the plan had been “ticked off” by the board).

36. The position paper referred to the business as that of LMA, even though the company had not been incorporated at that time. I will follow the same approach in summarising its content.

37. The objective by 2021 was to achieve annual sales of $25 million with earnings before interest, tax, depreciation and amortisation (“EBITDA”) of $3 million. These figures were exclusive of the existing TMAA adhesive label business.

38. These increases were to be achieved by establishing a new purpose-built and “state of the art” manufacturing facility in Melbourne. The new facility was to cost $18 million and was to be operational by July 2017. TMAA’s existing business in Sydney would then be moved there. New lamination and printing equipment would be purchased for $2.5 million. This, it was hoped, would make LMA the lowest cost operator in the market.

39. LMA was to expand the existing business in a number of ways. First, business was to be obtained from new customers. The position paper contained a list of 32 industrial companies who could be targeted. It was also proposed that the existing business would be expanded by undertaking more work within market segments where the existing business already had customers. Seven existing customers were identified, including two airline companies. Market share would also be increased by participating in industry consolidation (resulting from the industry circumstances described above) through the acquisition of smaller businesses.

40. The intention was to increase LMA’s market share in certain identified sectors. The ultimate objective was for LMA to capture 15 per cent of the Australian and New Zealand market. This would have made LMA number two in the market. The increase was to come from certain identified sectors. Food and beverage was to increase from 1 per cent to 12 per cent; fast-moving consumer goods from 1 percent to 15 per cent; retail from 25 per cent to 50 per cent; and transport from 20 per cent to 45 per cent.

41. The position paper identified a management team consisting of a Chief Executive Officer, a Chief Operating Officer, and a Chief Technology Officer. There was also to be general managers for sales and marketing and for operations; an IT manager; and an accountant or financial controller. The finance department would report to the CEO of the TMA Group (Mr Karam). All other departments (including technical services, productions and operations, occupational health and safety, human resources, sales and marketing, and information technology) would report to the CEO of LMA.

42. Despite the reference in the position paper to LMA, no new subsidiary was incorporated following the TMA Group directors’ approval of the expansion plan. Instead, the business was expanded within TMAA. On 20 February 2017 Mr Chatzopoulos signed a further formal employment contract with TMAA (replacing the one signed in October the previous year). He started work pursuant to that contract on 23 February.

43. The February 2017 contract provided for Mr Chatzopoulos to be employed by TMAA as “Chief Executive Officer”. His annual salary was approximately $480,000. The contract could be terminated by either party on six months’ notice. It was also terminable at will by TMAA in the event of misconduct. I will describe the clauses dealing with Mr Chatzopoulos’ duties, and the restraint clauses, in more detail below.

18. For about thirteen months, Mr Chatzopoulos worked as an employee of TMAA. Then, in March 2018, LMA was incorporated, and the adhesive label business was transferred to it. At the same time, Mr Chatzopoulos signed the letter agreement which provided for the transfer of his employment from TMAA to LMA. I describe the letter agreement in more detail below.

19. Mr Chatzopoulos then worked as Chief Executive Officer of LMA for a further period of a bit more than three years. The Covid-19 pandemic seems to have created difficulties with the business. It does not seem to have fulfilled the hopes reflected in Mr Chatzopoulos’ position paper.

20. There is no direct evidence about the size of the business in March 2018, which, on LMA’s case in these proceedings, is the relevant date for the purpose of determining reasonableness. Presumably, the plan set out in the position paper was in the course of being put into effect, but the extent to which that had been done was not identified. Nor were Mr Chatzopoulos’ precise duties at that time.

21. By May last year tension had developed between Mr Chatzopoulos and the Karams. There was evidence from Mr Chatzopoulos, and some cross-examination of Mr Karam, on this subject. There was no objection to this evidence, although, as will be seen, its relevance may be debateable.

22. According to Mr Chatzopoulos, as time went on Ms Karam assumed the main decision-making role in all of LMA’s operations. The warehouse manager reported to her; and so too did the finance department, the procurement department, and the estimates department. According to Mr Chatzopoulos, Ms Karam directed everything done by LMA’s staff, except for the two sales staff he had recruited.

23. According to Mr Chatzopoulos, he was allowed little or no financial latitude. He had to approve customer credits, but the credits could not be issued without Mr Karam’s approval. Permission also had to be obtained from Ms Karam for even quite trivial expenditure.

24. Mr Chatzopoulos resented the level of control exercised by the Karams. He came to see himself as a “glorified sales manager”.

25. On 21 June last year, Mr Karam sent a letter to Mr Chatzopoulos giving him notice of termination of his employment. This letter followed some sort of contretemps between Mr Chatzopoulos and Ms Karam. In an email to staff on 23 June, Mr Karam stated that Mr Chatzopoulos’ position was being made redundant and his functions were to be assumed by another employee, Ms Kate Appleby, who would continue under the job title of National Sales Manager, Labels. Mr Chatzopoulos was to hand over to her, a process which was hoped would be completed by the following Friday 2 July.

26. There was a debate about when the handover was actually completed and Mr Chatzopoulos ceased to have contact with LMA’s customers, but this does not need to be resolved. On any view, it seems to have occurred before the planned handover date of 2 July 2021.

27. The letter of 21 June had imposed on Mr Chatzopoulos (in accordance with his employment contract) a period of “gardening leave”. During this period he was obliged to be available for any tasks which might be allocated to him. It seems that all he was asked to do was to answer three work-related queries. LMA continued to pay his salary up until the formal date of termination which was 20 December.

28. Mr Chatzopoulos appears not to have sought any further employment for a period of five months after the formal termination of his employment with LMA. Then on 1 June this year, solicitors acting for him wrote to LMA advising that he proposed to take up a position as managing director of an Australian company called United Labels and Packaging Pty Limited. It seems that this company, or its business, or both, have been acquired by Reflex Asia Pacific, which is a subsidiary of a multinational group based in Britain. The letter sought LMA’s consent to this new employment.

29. Mr Karam did not become aware of the 1 June letter until 21 June, when a follow-up letter was sent. The reason for this was not explained in the evidence, but is not now important. Solicitors acting for LMA wrote to Mr Chatzopoulos’ solicitors refusing consent and asserting that the restraints prevented his proposed employment. When that was rejected, the proceedings were begun.

30. Early in July, Mr Chatzopoulos entered into a formal employment agreement with Reflex Asia Pacific. That agreement provided for Mr Chatzopoulos to be employed by Reflex Asia Pacific as its managing director on an annual salary of $550,000.

Witnesses and documentary evidence

57. At the hearing, affidavit evidence was led for LMA by Mr Karam, and he was cross-examined. Mr Chatzopoulos gave affidavit evidence in his own case and he too was cross-examined. There were some conflicts in the evidence, but none that require resolution for the purpose of these proceedings. It is not necessary to undertake any analysis of the credit of the witnesses.

58. Mr Chatzopoulos acknowledged that he helped Mr Karam find new premises at a time he was still employed by Labelmakers (his employment with Labelmakers did not cease until 14 November). He acknowledged he should not have done this. His work on preparing the plan may also have involved other breaches of his fiduciary obligations to Labelmakers. But it was not suggested by any party to the proceedings that it had any relevance for the purposes of these proceedings.

59. Mr Karam sought to give affidavit evidence about the lengths of employment restraints imposed by TMA Group on its other executives. This evidence was largely rejected because of deficiencies in form. In oral evidence, Mr Karam gave evidence that before the October 2016 employment contract was signed, he and Mr Chatzopoulos discussed TMA Group’s practice on post-termination restraints. He said that all executive employees needed to have a restraint provision in their contract with a duration that depended on their role within TMA Group.

60. According to Mr Chatzopoulos, when signing the February 2017 employment contract he did not pay any attention to the restraints it contained (the same was so for the October 2016 employment contract). He said in cross-examination that he had no practical alternative; the suggestion was that by February 2017 his employment with Labelmakers had been terminated. At the same time, it was never suggested that any form of duress was at work.

Evidence post-dating the employment contract

61. Parts of Mr Karam’s evidence went into the specifics of confidential information which Mr Chatzopoulos held, or might have held, at the time he stopped working for LMA. But as will be seen, it was common ground between the parties that the reasonableness of a covenant must be judged as at the time that it is given. I therefore put to counsel for LMA that Mr Karam’s evidence, dealing as it did with actual events after March 2018 (which was the date, on LMA’s case, that the restraints were agreed), rather than with contingencies which would have been foreseen or expected as at that date, was not relevant. Counsel did not demur and the relevant passages in the affidavit were not pressed.

62. A similar issue arose with some of Mr Chatzopoulos’ evidence, but his counsel submitted that the evidence was relevant insofar as it related to the period up to March 2018. I had some reservations about this but objections were not very strenuously pressed by counsel for LMA and most of the evidence was admitted.

63. No similar objection exercise was undertaken on the documents which had been included in the court bundle. Thus, documents which had been exhibited to the parties’ affidavits and which post-dated March 2018 were admitted even though the affidavit evidence which accompanied them was not.

64. The result is that the relevance of some of the evidence about dealings between the parties is open to question. Nevertheless I will refer briefly to this evidence below. I will return to its relevance when addressing the legal issues later in the judgment.

65. The evidence before me does not describe LMA’s current operations in any great detail. According to Mr Karam’s evidence, which was not contested, LMA’s customer base now is primarily in the following sectors: food and beverage; fast-moving consumer goods; transport; and retail. LMA has about 30 employees. Mr Karam stated that contractual arrangements for the production of labels may last for as long as one year or even three years. The process of winning a contract may take between one and three months.

66. Among the documentary evidence is a set of LMA’s board papers for the ten months to 30 April 2021. According to the papers, LMA’s sales for the period were $9.2 million. This was up 24 per cent on the year before, but was still much less than the $25 million which had been envisaged in Mr Chatzopoulos’ position paper. The EBITDA for the period was a loss of $500,000. This was a large improvement on a $1.9 million loss in the preceding year but again was a far cry from the $3 million in EBITDA which was the objective in the position paper.

67. The April 2021 board papers also contained a breakdown of sales figures between sales staff. Mr Chatzopoulos was shown as one of the three sales staff for this purpose; during the period shown his share of sales was the largest.

Enforcement of employment restraints

Employment contract

68. The February 2017 employment contract was prepared by TMA Group’s in-house counsel on instructions from Mr Karam. Mr Chatzopoulos was referred to in the agreement as “the Executive”. TMAA was referred to as “the Company”.

69. Clearly the form of the agreement was a standard one. The final version contained at least five blank spaces, two of which were filled in by hand and three of which were left blank.

70. The recitals stated:

A.   The Company has offered the Executive employment on the terms and conditions set out in this Agreement as the [handwritten “Chief Executive Officer (C.E.O)” filled in] of the Company and the Executive has accepted that offer.

B.   The Executive has had the opportunity of taking, legal advice in relation to the nature, effect and extent of this Agreement prior to entering into it and considers the terms of this Agreement to be fair and reasonable.

71. Clause 3 dealt with the services to be provided by Mr Chatzopoulos. Relevantly clauses 3.1 to 3.4 provided:

3.1   Duties: General

During the Engagement the Executive must:

(a)   perform to the best of his abilities and knowledge, and in a proper and efficient manner, the duties assigned to the Executive by the Chief Executive Officer [sic] together with such other duties as the Board may reasonably require from time to time;

(b)   perform the duties assigned to him during such reasonable hours as are necessary to effectively perform the role of [blank space] and as the Group's business requires, including when required on weekends;

…

(h)   report to the Chief Executive Officer [sic] or such person or persons as nominated by the Company from time to time;

...

3.2   Duties: Specific

Without limiting the obligations set out in clause 3.1, the Executive acknowledges that:

(a)   he will be responsible for the duties outlined in Schedule B;

(b)   he will not act in conflict with the Company's or Group's best interests;

(c)   he has disclosed, and will during the Term continue to disclose, to the Chief Executive Officer [sic] immediately any actual or potential conflict of interest between his interests and those of the Company or Group; and

(d)   he must take reasonable steps to avoid any actual or potential conflict of interest.

3.3 Hours of work

The Executive is required to work 38 hours per week plus all such reasonable additional hours as may be required to properly perform and carry out the Executive's duties and responsibilities in accordance with this Agreement.

3.4 Location

The Executive will perform the work at the Company's Melbourne office in Victoria or in such further or other places as the Company, acting reasonably, may direct.

72. Clause 3.2(a) referred to duties “outlined” in Schedule B. But although there was a Schedule B attached to the agreement, it was blank.

73. The “Group” referred to in clauses 3.1(b), 3.2(b) and 3.2(c) was defined as meaning:

(a)   the Company;

(b)   the Holding Company;

(c)   [TMAA];

(d)   each entity within the meaning of the Accounting Standard AASB 1024: Consolidated Accounts in respect of which the Company or Holding Company is the parent entity;

(e)   for the avoidance of doubt, each Related Body Corporate of an entity within the Group;

...

74. The term “Holding Company” was defined as “the TMA Group of Companies Pty Limited” (sic), and used TMAA’s ABN. But clearly this was a mistake and the intention was to refer to the TMA Group of Companies Australia Limited, which I am referring to in this judgment as TMA Group.

75. Despite the capitalisation, the term “Related Body Corporate” was not defined. I am inclined to think that, even without express reference, this would be taken as having the meaning in the Corporations Act 2001 (Cth) s 9. But even if it did not, I think it plainly included other subsidiaries of TMA Group.

76. The term “Board”, referred to in clause 3.1(a), was defined as meaning:

the board of directors of the relevant entity identified in a particular clause of this Agreement as constituted from time to time …

In clause 3.1(a), the term presumably meant the board of directors of TMAA.

77. The post-employment restraints were dealt with by Clause 11. Clause 11.1 contained an acknowledgement of various “circumstances” relevant to the restraint. It provided:

11.1   Circumstances

The Executive acknowledges that, in the course of the Employment, he will:

(a)   have a high level of access to Confidential Information;

(b)   gain knowledge of the Group [defined to include all related corporations of TMAA] well beyond that in general circulation;

(c)   have knowledge of, and influence over, the customers of the Group because of the personal relationships he will form with representatives of those customers;

(d)   have a position of leadership within the Group such as to enable the Executive to hold a degree of influence over the personnel of the Group; and

(e)   as a result of each of the foregoing, have the ability to cause significant damage to the Company and/or the Group,

(collectively the Circumstances).

78. The term Confidential Information, referred to in clause 11.1(a), was defined as meaning:

information of any kind:

(a)   concerning or in any way connected with:

(i)   the Group; or

(ii)   the business, property or affairs of the Group; and

(b)   which is the property of the Group; and

(c)   which is disclosed in writing, orally or by any other means by the Group or by any person on the Group's behalf to the Executive or which comes to or has come to the knowledge of the Executive by any means; and

(d)   and must include:

(i)   information pertaining to any existing or potential customer, supplier, contractor, agent, joint venturer, partner, licensor or licensee of the Group;

(ii)   customer and supplier lists and information;

(iii)   information emanating from or belonging to the Group or any existing or potential customer, supplier, contractor, agent, joint venturer, partner, licensor or licensee of the Group;

(iv)   all information which has been provided by a third party to the Group on the basis that it is to be kept confidential;

(v)   business plans, strategic business initiatives, and information relating to business development and marketing activities of the Group;

(vi)   technical data and standards, software codes, technical advice and trade secrets, service standards, data, formulae, designs, drawings, specifications, inventions, devices and methods of the Group;

(vii)   correspondence, accounts, price information, customer data and records of the Group;

(viii)   information technology systems, technology, computer software, work processes, developments, blue prints, experimental methodology and results of the Group; and

(ix)   any information relating to the businesses, employees, shareholders, customers or suppliers of the Group; and which is not public information or publicly distributed otherwise than in breach of any obligation of confidence;

79. The restraints were then set out in clause 11.2. That clause stated that the restraints were given “to protect the Group’s interests in the light of the Circumstances”. They were to operate during what was defined as the Restraint Period and in the Restraint Area.

80. The Restraint Period was defined as meaning:

(i)   the period of 24 months after the termination of the Executive's employment with the Company for any reason, but if that is held by a Court to be unenforceable;

(ii)   the period of 12 months after the termination of the Executive's employment with the Company for any reason, but if that is held by a Court to be unenforceable;

(iii)   the period of 6 months after the termination of the Executive's employment with the Company for any reason.

81. The Restraint Area was defined as meaning:

(i)   Within the United States of America, United Kingdom, Canada, Ireland, any country within the European Union, the Philippines, Hong Kong, China, Indonesia, Malaysia, Singapore, Japan, Thailand, Australia and New Zealand but if that is held by a Court to be unenforceable;

(ii)   Within the Philippines, Hong Kong, China, Indonesia, Malaysia, Singapore, Japan, Thailand, Australia and New Zealand, but if that is held by a Court to be unenforceable;

(iii)   Australia, but if that is held by a Court to be unenforceable;

(iv)   each Australian State or Territory in which the Executive performed work for the Company, but if that is held by a Court to be unenforceable;

(v)   Victoria and New South Wales, but if that is held by a Court to be unenforceable;

(vi)   Melbourne and Sydney, but if that is held by a Court to be unenforceable;

(vii)   Melbourne.

82. The non-competition restraint was set out in sub-clause 11.2(a). Mr Chatzopoulos promised that he would not, during the Restraint Period and in the Restraint Area “have any Involvement in or with any Restricted Business”.

83. Although capitalised, there was no definition of the term “Involvement”. The term Restricted Business was defined as meaning:

any business which competes with, or is of a similar nature to the business carried on by the Company and Group from time to time …

84. The non-solicitation restraints were set out in sub-clauses 11.2(b) to (d). Mr Chatzopoulos promised that he would not, during the Restraint Period and in the Restraint Area:

(b)   (solicit Business Contacts) directly or indirectly;

(i)   solicit or attempt to solicit any Business Contact, where such solicitation in any way relates to products and/or services provided by the Company or to be received by the Company from the Business Contact; or

(ii)   divert, entice or take away, or attempt to divert, entice or take away, any Business Contact; or

(c)   (solicit Prospective Business Contacts) directly or indirectly:

(i)   solicit or attempt to solicit any Prospective Business Contact, where such solicitation in any way relates to products and/or services proposed to be provided by the Company or proposed to be received by the Company from the Prospective Business Contact; or

(ii)   divert, entice or take away, or attempt to divert, entice or take away, any Prospective Business Contact;

1. (d)   (solicit personnel) directly or indirectly, offer to hire, entice away, or in any other manner persuade or attempt to persuade any director, officer, employee, agent or representative of the Company who has held that position at any time within 12 months of the date of solicitation, to discontinue his, her or its relationship with the Company …

85. For the purpose of sub-clause (b), Business Contact was defined as meaning:

the customers, clients, lenders, suppliers, service providers, manufacturers, agents, distributors, joint-venture participants of the Group in the period of 12 months up to and including the termination of the Employment …

86. For the purpose of sub-clause (c), Prospective Business Contact was defined as meaning:

parties with whom any Group Company was, to the Executive's knowledge, intending to enter into a relationship of customer, client, lender, supplier, service provider, manufacturer, agent, distributor or joint-venture participants as at the date of termination of the Employment ...

Transfer of restraint covenants to LMA

87. The first question is whether the effect of the LMA transfer letter was to pick up the restraint covenants in Mr Chatzopoulos’ original employment contract with TMAA.

88. The LMA transfer letter was headed “Variation to employment agreement”. The body of the letter relevantly stated (emphasis added):

As you are aware, [TMAA] is undertaking an administrative restructure as part of the integration process with [LMA]. As a result, we propose to transfer your employment with [TMAA] to [LMA] from 26 March 2018.

Accordingly, from 25 March 2018, you will cease to be an employee of [TMAA] and your employment will transfer to [LMA]. In order for this to occur, your acceptance of this transfer will amount to your resignation from [TMAA]. Apart from the change to your employer, the terms and conditions of your employment as set out in your contract with [TMAA] dated 20th February 2017 will remain the same and your period of service will remain unbroken and be recognised by [LMA].

For absolute clarity, as a result of this transfer:

•   your position, duties, rate of pay and other terms and conditions of your employment will remain as they are at present;

•   your entitlements to annual leave, personal leave and long service leave, accrued and untaken during your employment with [TMAA] will be carried over to your employment with [LMA]; and

•   your service with [TMAA] will be regarded as continuous service with [LMA] for all purposes, including when determining all statutory and contractual entitlements.

Please sign the attached copy of this letter below to indicate your acceptance of this transfer with effect from 26 March 2018 …

89. The question is whether the restrictive covenants in the contract with TMAA were “terms and conditions of [Mr Chatzopoulos’] employment” for the purposes of the LMA transfer letter.

90. Counsel for Mr Chatzopoulos relied upon the decision of White J (as his Honour then was) in Aussie Home Loans v X Inc Services [2005] NSWSC 285. In that case there was a similar transfer of employment from one company to another. The transfer was accompanied by a letter which stated that the “terms and conditions of your [the transferred employees’] employment [with the new employer] will not differ from those you currently have with” the old employer.

91. His Honour said (at [52]):

There was no express reference in the correspondence to [post-contractual restraints such as restraints on solicitation]. The only terms which were expressly incorporated as terms of the contracts between those defendants and the [new employer] were “the terms and conditions of your employment”. In my view, the terms included in that expression were the terms which regulated the [transferred employees’] employment with the [new employer], i.e., what were their duties, their remuneration, their hours of work, their entitlements to annual leave, sick leave, long-service leave and superannuation, when their employment could be terminated, and the like. I do not consider that the post-contractual restraints are properly characterised as the terms and conditions of their employment. Rather they were what were characterised in some contracts as “post-employment obligations”.

92. In the present case, however, the transfer letter went further than saying that the “terms and conditions” of the new employment would remain the same as (or, as in Aussie Home Loans, “not differ from”) those of the old employment. The letter referred to the “terms and conditions … as set out in” the February 2017 employment contract with TMAA.

93. In my view this language, in its natural meaning, referred to all of the terms and conditions upon which Mr Chatzopoulos had been employed by TMAA, and included the post-employment restraints specified in the contract. Even if those restraints were not strictly speaking terms and conditions which applied during the employment itself, they were ancillary to that employment: General Billposting v Atkinson [1909] AC 118 at 121 per Lord Robertson; S W Strange Ltd v Mann [1965] 1 All ER 1069. I think it would be a cramped and artificial reading of the letter to say that it left those terms out.

94. I therefore conclude that the terms of Mr Chatzopoulos’ employment with LMA from March 2018 onwards picked up the employment restraints in his February 2017 employment contract with TMAA.

Reasonableness of restraints

95. It is convenient in dealing with the next point to take the case for LMA at its highest. That case is that the Restraints of Trade Act applies, so that the restraints in the covenants can be read down to what is reasonable without the need for severance.

96. There was little debate between the parties about the applicable law. Counsel for both parties were content for me to apply the principles stated in general form by the Court of Appeal in Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343 at [59]-[68]; see also Belflora Pty Ltd v Vinflora Pty Ltd (2021) 106 NSWLR 67 at [26] per Bathurst CJ, [44]-[49] per Brereton JA.

97. As a general rule, the Court will scrutinise the reasonableness of a restraint on a former employee more strictly than it will scrutinise the reasonableness of a restraint given by the vendor of a business: Isaac at [67]. I have therefore confined my attention to authorities involving employment, rather than vendor, restraints. Two well-known decisions of this type (which were cited by the Court of Appeal in Isaac) are the decisions of Brereton J, as his Honour then was, in Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9 and in Tullett Prebon (Aust) Pty Ltd v Purcell [2008] NSWSC 852. There is also the decision of the Full Federal Court in Pearson v HRX Holdings Pty Ltd (2012) 205 FCR 187 and the decision of Edelman J, when a Judge of the Supreme Court of Western Australia, in Emeco International Pty Ltd v O'Shea (No 2) (2012) 225 IR 423.

98. The question must of course be judged by reference to the duties agreed between employer and employee. But there is little guidance about that in Mr Chatzopoulos’ employment contract. Ignoring the circular references to instructions from the Chief Executive Officer (see [70]-[71] above), the Court is left with the fact that Mr Chatzopoulos was to act under the direction of the Board of Directors. The content of his duties was left undefined, except for those implicit in the phrase “Chief Executive Officer” itself.

99. Both parties appeared to proceed on the basis that the Court could (at least in determining his agreed duties when his employment with LMA began in March 2018) have regard to Mr Chatzopoulos’ position paper. But that did not contain a duty statement either, although it does allow some inferences to be drawn from the management structure which it described.

100. Solicitation of customers etc: I have set out the terms of the relevant restraints at [84] above. An immediate problem with them is that they are not confined to dealings with customers, actual or prospective, of LMA. They apply equally to dealings with suppliers and service providers to LMA.

101. It is conceivable that the obtaining of supply of particular goods or services for a business could involve some sort of confidential know-how. But there is no suggestion of that in the present case. And it is hard to see how a blanket ban on dealing with LMA’s suppliers and service providers could ever be justified as reasonable. In theory if LMA bought its paper clips from a particular chain of stationery shops, Mr Chatzopoulos would be prevented, in his new employment, from causing Reflex Asia Pacific to buy its paper clips from the same chain.

102. Counsel for LMA sought to meet this problem by seeking, at the trial, a more limited restraint than had been claimed in the summons. What was sought was an injunction to prevent Mr Chatzopoulos from (emphasis added):

…

c.   directly or indirectly soliciting or attempting to solicit the business or custom of any customer or client of the TMA Group where the customer or client was a customer or client of TMA Group in the period 20 December 2020 to 20 December 2021;

d.   directly or indirectly diverting, enticing, or taking away or attempting to divert, entice, or take away any customer or client of the TMA Group where the customer or client was a customer or client of TMA Group in the period 20 December 2020 to 20 December 2021;

e.   directly or indirectly soliciting or attempting to solicit any prospective customer or client of the TMA Group who was, to the Defendant’s knowledge, intending to enter into a relationship of customer or client, as at 20 December 2021;

f.   directly or indirectly diverting, enticing, or taking away or attempting to divert, entice, or take away any prospective customer or client of the TMA Group who was, to the Defendant’s knowledge, intending to enter into a relationship of customer or client, as at 20 December 2021 …

The term “TMA Group” was defined as meaning LMA or TMAA. The restraints were to apply “in Australia” and were to last until 20 December 2023.

103. TMAA’s label business was presumably transferred to LMA long before December 2020. The evidence does not identify what its residual business was. There is nothing to suggest that the parties contemplated that Mr Chatzopoulos would have anything to do with running it. It is hard to see how LMA would have a legitimate interest in preventing dealings with post-December 2020 customers of TMAA. But I can pass over this question because there is a more fundamental issue.

104. Even in its narrowed form, the injunction which LMA seeks would prevent Mr Chatzopoulos from approaching customers, or former customers who ceased to be customers of LMA during the relevant period, with whom he himself did not deal during his employment with LMA. Thus there remains a question, quite apart from the duration of the restraint, about whether its scope extended beyond what was necessary to protect LMA’s legitimate interests.

105. A question of this type arose for decision in Emeco. Edelman J stated the relevant principles at [184]-[194] and applied them to the facts of the case at [195]-[208]. Usually, a legitimately protectable customer connection only exists where the employee actually deals with the customer. But there are some cases where a sufficient connection can exist without personal dealings. One is where the nature of the employer’s business is such that the employee may be expected to have personal dealings with all of the customers of the business, even if the employee’s job description does not necessarily require that: see at [188]. Another is where, as a result of supervising the staff who do have contact with the employer’s customers, the employee may be expected indirectly to develop knowledge of, and influence over, those customers: see at [189]-[192].

106. In the present case, Mr Chatzopoulos’ position paper shows that it was contemplated that he would have a general manager for sales reporting to him, presumably with further sales staff below that general manager. While it may have been expected that Mr Chatzopoulos would develop a working relationship with some of LMA’s major customers it was not contemplated that he himself would deal with all of LMA’s customers, large and small. Nor is there anything to show that it was contemplated that Mr Chatzopoulos would necessarily develop, indirectly, a substantial knowledge of, or influence over, all of the customers with whom LMA’s sales staff would be dealing. In my view, the form of the injunction sought is too wide.

107. If, as I am assuming, for present purposes, the Restraints of Trade Act applies, the conclusion which I have just reached would not necessarily be the end of the issue. In theory, it might be possible to formulate a restraint of a narrower scope, perhaps by reference to individual customers, or a class of individual customers, whom Mr Chatzopoulos might have been expected to cultivate in his role as Chief Executive Officer.

108. But no such fall-back formulation was propounded by counsel for LMA. In any event, for reasons given below when considering the competition restraint, I do not consider that the evidence establishes that LMA’s interest in protecting its customer connections requires a restraint extending beyond the date of the hearing.

109. Solicitation of employees etc: I have set out the terms of the relevant restraint at [84] above. As formulated by counsel at trial, LMA sought an injunction to prevent Mr Chatzopoulos from:

directly or indirectly, offering to hire, enticing away, or in any other manner persuading or attempting to persuade any director, officer, employee, agent or representative of [LMA] who has held that position at any time within 12 months of the date of solicitation, to discontinue his, her or its relationship with [LMA] …

110. Again, the proposed restraint appears to go further than is reasonably necessary to protect LMA from unfair competition for its staff. It is not limited to employees etc with whom Mr Chatzopoulos dealt, or over whom he would have been expected to have acquired an indirect influence.

111. LMA’s application for an injunction in this form faces a more fundamental difficulty. The Court starts from the assumption that an employee such as Mr Chatzopoulos, who is well aware of the terms of the post employment restraints contained in his contract, will comply with them, to the extent they are valid. To justify an injunction, LMA must go beyond pointing to a theoretical possibility of breach. LMA must show that there is a real threat.

112. The employment restraint, like the other restraints which LMA seeks to enforce, prevents Mr Chatzopoulos from engaging in specified conduct without the consent of LMA. The present litigation began when Mr Chatzopoulos notified LMA that he intended to take up employment with Reflex Asia Pacific and LMA refused its consent. Clearly there is a sufficient threat to justify an injunction based on the employment restraint, if it is valid.

113. In his new employment, it is also to be expected that Mr Chatzopoulos would be trying to obtain business from customers of LMA which Reflex Asia Pacific could profitably take on (although, in fact, there is no evidence identifying any such customers). Indeed it would be his obligation to do so. Thus, no further evidence may be required to establish a sufficient threat to justify an injunction on the non-solicitation restraint.

114. But the employment restraint stands in a different position. Just because Mr Chatzopoulos wishes to take on the position as managing director of Reflex Asia Pacific does not mean that in that role he will wish to poach any of LMA’s employees. There is no evidence of the composition of Reflex’s existing workforce, or of such expansion plans as Reflex might have for between now and December 2023.

115. When I asked counsel for LMA what evidence he had of any threat by Mr Chatzopoulos to breach the employment restraint (assuming it to be enforceable for its full period) he was unable to point to any. In my view there would be no justification for an injunction even if the restraint is still enforceable.

116. Competition: The covenant (see at [82]-[83] above) applies to “involvement” with a “similar” business whether competitive with LMA or not. There are questions about the scope of the term “involvement” as it may apply to other businesses, but for simplicity I will focus for the moment on employment in such a business.

117. LMA sought to enforce the clause only “in Australia” but the scope of the covenant still invites questions about whether LMA may legitimately obtain protection against Mr Chatzopoulos’ employment in a business which is similar in nature to, but not competitive with, LMA’s business. Furthermore, even if confined to a competing business, the covenant applies to employment in a competing business in any capacity. In its terms it would prevent Mr Chatzopoulos from being employed in a menial role which presented no competitive threat to LMA.

118. Again, counsel for LMA sought in the course of final submissions to meet the difficulties by propounding a narrower injunction, which would have applied “in Australia” until 21 December 2023. It would have prevented Mr Chatzopoulos from (emphasis added):

a.   being an employee in a management or sales role or director of, or a contractor or consultant to [Reflex Asia Pacific] ...

b.   being an employee in a management or sales role or director of, or a contractor or consultant to any:

i.   label manufacturer;

ii.   food packaging manufacturer; and/or

iii.   sheet fed print company, web printing company or print management company.

119. In my view, this formulation did not entirely address the problems with the scope of the restraint. It is not clear why the interest derived from LMA’s employment of Mr Chatzopoulos as Chief Executive Officer would justify a prohibition on his employment in any “management role” even if such employment posed no competitive threat to LMA’s business. Similarly it is hard to see how LMA was entitled to protect itself from Mr Chatzopoulos being employed by a competing business, in any “sales role”, no matter how menial. Furthermore, the injunction would also have prevented Mr Chatzopoulos being engaged as a contractor or a consultant, without any limitation on the capacity in which he was so engaged.

120. But none of these issues arise for consideration if LMA is unable to prevent Mr Chatzopoulos from taking up the position which he has actually accepted, namely that of managing director of Reflex Asia Pacific. There was no dispute that the business of Reflex competes with that of LMA. Accordingly, I propose to consider the application of the restraint in that particular context and to deal with the wider restraints only if that one is enforceable.

121. In his submissions on the reasonableness of the restraint as so applied, counsel for Mr Chatzopoulos placed particular emphasis on two matters. The first was that, at least by the time his employment was terminated, Mr Chatzopoulos’ duties had descended to being a “glorified sales manager”. He had no control over, and, seemingly, little or no input into, the direction of LMA’s business. The second factor was that the formal termination of his employment took effect after a period of six months gardening leave. During that period he was not called upon to do anything of substance in LMA’s business. For practical purposes, his work for LMA ceased in June, so that by the time the matter came to trial, he had been out of the workforce for more than a year.

122. As already mentioned, it is well accepted that reasonableness is to be judged according to the circumstances which prevailed when the restraint was entered into, and both parties agreed that this is so. The evidence did not establish that the limitations in Mr Chatzopoulos’ actual duties as Chief Executive Officer, when compared with what had been contemplated in the position paper, had already manifested themselves when his employment was transferred to LMA in March 2018. Similarly, although the employment contract gave LMA the option to place Mr Chatzopoulos on gardening leave for up to six months before the formal termination of his employment, that was not obligatory. A question therefore arose as to whether either matter could properly be taken into account by the Court in determining whether the restraint was reasonable.

123. A similar question arose, in the context of an employer’s interest in protecting confidential information, in the decision of Brereton J in John Fairfax Publications Pty Limited v Birt [2006] NSWSC 995. His Honour said (at [46], citations omitted):

In exercising the discretion to grant or withhold injunctive relief, the Court has regard to the circumstances at the date of the hearing ... Thus even where judged as at the date of the contract a restraint is reasonable, the Court may on discretionary grounds withhold injunctive relief if at the date of hearing there is no protectable interest – for example, if despite contemplation at the date of contract that the employee would have access to confidential information, that did not eventuate. However, it is to be born in mind that restraints of the type contained in the second limb of clause 11 [a competition restraint] are sought and given because it is recognised that it may be difficult to prove with sufficient specificity the possession of confidential information, and courts should be slow to decline as a matter of discretion to enforce such a restraint, one it is found to be valid when created, on the grounds that it is unclear what confidential information if any the employee in fact possesses: it was to provide certainty and avoid the need for detailed proof of possession and apprehended misuse of confidential information that such clauses are upheld as valid.

124. In Cactus Imaging, the employee had been promoted after the employment contract was entered into and before the employer sought to enforce the restraint. Brereton J had regard to the employee’s duties after his promotion. He said (at [37]):

The reasonableness of a restraint must be judged at the time when the contract was made, but that does not mean that at that time the parties must disregard prospective future developments, including the prospect of promotion as an ordinary incident of employment. When this contract was made, Mr Peters was not employed as Cactus’ New South Wales State Sales Manager, but Regional Sales Manager. … Even after five years’ service, his employment was to be terminable on four weeks’ notice. However, it was foreseeable that he might be promoted to positions of greater responsibility, and the next step up the ladder from Regional Sales manager would presumably be State Sales Manager. That he would be promoted to such a role was within contemplation when he was originally employed: promotion is an ordinary incident of employment. Alternatively, the parties should be taken to have implicitly renewed the covenant at the time of his promotion: it is unthinkable that, if asked, either would have disputed that the restraint would continue to apply, having regard to Mr Peters’ new and greater responsibilities and remuneration.

See also his Honour’s judgment in Tullett Prebon at [88]-[93].

125. In Emeco, Edelman J recorded that there had been a vigorous factual contest between the parties concerning the scope of the employer’s operations, the confidential information actually provided to the employee, and the contact the employee had actually had with the employer’s customers, as at the date of trial. His Honour said that these matters were not relevant, or only marginally relevant, to what “might reasonably have been expected at the date of contract” (and thus to the reasonableness of the restraint). But they were relevant to what his Honour characterised as a further separate issue, namely whether the injunction which was sought “should be refused for reasons of discretion” (at [222]).

126. The Court of Appeal has stated that while reasonableness is to be judged at the date the contract is entered into, the Court takes events up to the date of the trial into account in deciding whether to grant an injunction: see Sidameneo (No 456) Pty Ltd v Alexander [2011] NSWCA 418 at [70]; Isaac at [63]. But in neither case was it necessary for the Court to apply that qualifying principle to the circumstances before it. In my view, there remains some uncertainty about how far the qualification goes.

127. In Birt, Brereton J spoke of the Court declining an injunction where the interest supporting the restraint had failed to eventuate, or ceased to exist, by the date of the trial. If the qualification were limited to such cases, it would not have any role to play in a case where the events as at the date of trial had not eliminated the interest but had only attenuated it (for instance, where confidential information had been provided to the employee, but that information justified only a lesser period of protection than information which had been in contemplation at the date the restraint was entered into). But what Edelman J said in Emeco suggests a wider enquiry about enforcement, not limited to the continuing existence of the interest in question.

128. In Cactus, Brereton J was prepared to treat an employee’s promotion as in effect a new starting point for the employment for the purposes of assessing the reasonableness of the restraint. This would seem to be a different approach from considering enforcement separately. Instead it is based on what was reasonable at the date of the contract, but builds in some flexibility. Its scope however may be a matter for debate.

129. In Cactus, Brereton J spoke of the promotion as “foreseeable”. Other authorities have spoken of what would have been “expected” at the date of the contract. In Lindner v Murdock’s Garage (1950) 83 CLR 628 at 653 Kitto J quoted the reference in Putsman v Taylor [1927] 1 KB 637 to the “best estimate” which the parties, at the outset of the service, “could then make of the future”.

130. These divergent formulations present no clear answer in the present case. Certainly the fact that Mr Chatzopoulos would be put on gardening leave six months before his employment was formally terminated was something that would have been foreseeable. But it would equally have been foreseeable that Mr Chatzopoulos could have been dismissed for cause with no notice, and in that case it would be entirely reasonable for LMA to have the maximum benefit of the restraint period from the date of termination.

131. Nor is there any reason to think that the parties ever turned their minds to what the most likely period of time would be between the cessation of Mr Chatzopoulos’ duties and the termination of his employment. Determining what they “expected”, or what their “best estimate” was, in this regard seems impossible. Similar observations apply to Mr Chatzopoulos’ effective demotion to a “glorified sales manager”.

132. Counsel for Mr Chatzopoulos referred me to the statements I have summarised above about the Court taking subsequent events into account when deciding whether to grant or refuse an injunction, but did not develop the argument beyond that. Deeper questions, such as those I have identified above, were not the subject of argument. In the circumstances the safe course was to decide the case without taking into account the effect of the reduction of Mr Chatzopoulos’ role to that of a “glorified sales manager”, or the period of gardening leave before the formal termination of his employment in December last year.

133. The Court may receive evidence on reasonableness, but within limits. If within the relevant trade there is a customary period for, or type of, restraint, evidence may be given of that custom (Haynes v Doman [1899] 2 Ch 13 at 24). Evidence may be given about the economic forces affecting the trade, and threats (and presumably opportunities) that the business faced at the time the restraint was granted (Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242 at 286). But the ultimate decision as to reasonableness is a matter for the Court.

134. There was little evidence of custom in the present case. To the extent Mr Karam’s evidence about the competition restraints imposed on TMA Group’s other executives was received, it was lacking in specifics. I doubt that specific evidence would have been relevant anyway. The considerations which applied to other management positions within LMA, or to a chief executive position elsewhere in TMA Group’s portfolio of businesses, would not necessarily have applied to Mr Chatzopoulos. What is lacking is any evidence of any market “tariff” for the duration of the post-employment restraint on the chief executive of an adhesive label business.

135. It is well established that a restraint on competition may be justified by the employer’s interest in protecting confidential information provided to the employee. It may also be justified by the employer’s interest in protecting customer connections. These interests may justify a restriction on competition even if the employer has obtained specific covenants preventing the disclosure of confidential information or the solicitation of customers.

136. The reason is a practical one: the employer will usually find it difficult to find out, where the former employee is working in a competing business, whether any specific restraints are being breached. In the case of confidential information, there may be an additional difficulty in that the former employee may find it practically impossible to put certain types of information out of his or her mind. But it must always be remembered that the employer is not entitled to protection against competition as such.

137. I will deal first with LMA’s interests in protecting its customer connections. In Cactus, Brereton J was dealing with the reasonableness of the duration of an employee covenant for a former sales manager. His Honour proceeded on the basis that the restraint would be reasonable only for a period reasonably required to recruit and train a suitable replacement who could take over dealings with the employer’s customers and have an opportunity to win their confidence. On the evidence before his Honour, that period of time fell within a range, depending on the characteristics of the customers. At one end of the range it was only a few months for the larger customers, with whom there were frequent dealings. At the other end of the range were the smaller customers, who might only be contacted once a year or so. His Honour concluded that a weighted reasonable time was twelve months.

138. In the present case I am prepared to accept that it may sometimes take months to land deals with customers, and contracts, once formed, may last for longer periods (see [65] above). But those periods of time are not the measure of what was reasonably required by way of uninterrupted handover to a new Chief Executive Officer. There is also the evidence from both sides that the market is a highly competitive one, apparently driven by price and performance rather than personal loyalty.

139. It needs to be remembered that Mr Chatzopoulos’ position under the employment contract was Chief Executive Officer, not sales manager. Although, the parties would have contemplated that Mr Chatzopoulos would have dealings with major customers, he was not to be the sole, or the predominant, face of LMA in dealing with customers.

140. In these circumstances, I simply do not think that LMA has established that a period of seven months (which was the time which elapsed between the termination of Mr Chatzopoulos’ employment and when the case came to trial) was insufficient to allow a reasonable period for Mr Chatzopoulos’ replacement as Chief Executive Officer (uninterrupted) to take over such customer connections as he was to develop.

141. As to confidential information, counsel for LMA emphasised Mr Chatzopoulos’ role in preparing and presenting his November 2016 position paper. But there was little in the paper that was apparently confidential to TMAA in November 2016, let alone to LMA in March 2018. The paper was effectively a “pitch” by Mr Chatzopoulos indicating how he proposed to run an expanded and differently managed business. The then current sales information which Mr Chatzopoulos used as the starting point for his sector targets (see [39]-[40] above) might not have been generally known, but that was all.

142. The employment contract did not provide for Mr Chatzopoulos to become a director of TMA Group (or LMA). It was the board who would in the ordinary course have been expected to set the strategy; Mr Chatzopoulos as Chief Executive Officer was required to carry it out. That would have given him some knowledge of the strategy from observation, but not necessarily any understanding of the Karams’ future plans and financial constraints. And the only evidence about a specific type of confidential information is that pricing information was outdated after six months. Again, there was a lack of evidence to show affirmatively why a period of more than seven months was required to provide reasonable protection for such confidential information of LMA as Mr Chatzopoulos was to encounter.

143. It may be accepted that other interests of LMA as employer might arguably be engaged, such as its interest in protecting its workforce from poaching. But this was not argued in the present case (at least so far as I discerned). In any event there is no evidence on the subject.

144. In the end, I was not satisfied that LMA had demonstrated the existence of any recognised interest which would justify the continuation of the restraint for a longer period than seven months. Accordingly, even if the covenants could be read down in accordance with the Restraints of Trade Act, LMA did not establish that their continued application to Mr Chatzopoulos would be reasonable. LMA’s case had to fail for this reason.

Application of Restraints of Trade Act

145. The Restraints of Trade Act does not contain any provision directly bearing on its application outside the State. The term “restraint of trade” is defined in s 2 as:

… a restraint of trade created by contract, created by the rules of an association, or otherwise created.

146. The Act thus does not specify whether it applies to the enforcement in New South Wales of restraints created under the laws of other jurisdictions. The question is therefore to be determined according to common law principles of statutory interpretation.

147. The relevant principle was stated by Dixon J in Wanganui-Rangitikei Electric Power Board v Australian Mutual Provident Society (1934) 50 CLR 581 at 601:

The rule is that an enactment describing acts, matters or things in general words, so that, if restrained by no consideration lying outside its expressed meaning, its intended application would be universal, is to be read as confined to what, according to the rules of international law administered or recognized in our Courts, it is within the province of our law to affect or control. The rule is one of construction only, and it may have little or no place where some other restriction is supplied by context or subject matter. But, in the absence of any countervailing consideration, the principle is, I think, that general words should not be understood as extending to cases which, according to the rules of private international law administered in our Courts, are governed by foreign law.

148. In Wanganui the issue concerned the application of New South Wales moratorium legislation. It was held that the legislation should be interpreted as applying only to contracts governed by the law of New South Wales.

149. In Kay's Leasing Corporation Pty Ltd v Fletcher (1964) 116 CLR 124, the issue involved the application of legislation regulating hire-purchase agreements. The test applied was the same, but the result was the opposite. Kitto J said (at 143):

Where a provision renders an agreement void for non-compliance by the parties or one of them with statutory requirements, especially where the requirements can be seen to embody a specific policy directed against practices which the legislature has deemed oppressive or unjust, a presumption that the agreements in contemplation are only those of which the law of the country is the proper law according to the rules of private international law has no apparent appropriateness to recommend it, and indeed, for a reason of special relevance here, it would produce a result which the legislature is not in the least likely to have intended. It would mean that provisions enacted as salutory reforms might be set at nought by the simple expedient adopted in the present case of inserting in an agreement a stipulation that validity should be a matter for the law of some other country.

150. In KA & C Smith Pty Ltd v Ward (1998) 45 NSWLR 702, Austin J considered the application of the Act in circumstances where a franchise agreement had been prepared in Victoria and the franchisor sought to enforce it against a New South Wales franchisee in this State. The suggestion was that the franchise contract which contained the restraint was governed by the law of Victoria.

151. His Honour considered the two different categories of case by reference to the decisions in Wanganui and Kay’s Leasing. He stated (at 720A) that application of the Act “clearly” fell into the former category. Accordingly, the Act did not apply if the proper law of the contract was Victorian law. But in the end his Honour found that the law of the contract was that of New South Wales and the Act therefore applied. The view which he formed was not in the end decisive and his remarks were obiter.

152. In the present case the issue arose in the opposite way. I was concerned with the enforcement in Victoria, against a Victorian resident, of a restraint which (it is assumed for the sake of argument) was found in a contract governed by the law of New South Wales. As the Court had cross-vested jurisdiction from the Supreme Court of Victoria, and restraint in Victoria was in question, it may well have been appropriate to look at the question as if it had arisen in that Court: cf Re Rinehart (2020) 104 NSWLR 274 at [112]-[113].

153. I respectfully think there is room for argument about whether, at least in that context, what Austin J says is correct. The restraint of trade doctrine exists, not in the interests of a party who agrees to an onerous restraint, but in the public interest in free trade. In the present case, the question is whether public policy in Victoria permits the enforcement of the restraint in that State. To my mind that appears to make Kitto J’s reasoning in Kay’s Leasing applicable.

154. In the end however there is no need to reach a final conclusion on this. LMA’s claim failed on other grounds.

Orders

155. The orders of the Court made on 29 July 2022 were:

1. Order that the summons be dismissed.

2. Order that the plaintiff pay the defendant’s costs of the proceedings.

3. Order, there being no objection from the plaintiff in the light of the Court’s decision, that the undertakings given by the defendant to the Court on 13 July 2022 be discharged.

4. Reserve leave to the defendant within 14 days after the issue of the Court’s reasons for judgment, to apply for:

1. a special costs order; or

2. an order for assessment of any damages claimed under the undertaking as to damages given by the plaintiff on 13 July 2022.

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Decision last updated: 06 September 2022