| JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA LOCATION : PERTH CITATION : LOGIKAL PROJECTS PTY LTD -v- DAWSON [2012] WADC 109 CORAM : GOETZE DCJ HEARD : 6-8 MARCH 2012 DELIVERED : 6 JULY 2012 FILE NO/S : CIV 3643 of 2010 BETWEEN : LOGIKAL PROJECTS PTY LTD Plaintiff
AND
GLEN OWEN DAWSON
Defendant
FILE NO/S : CIV 3644 of 2010 BETWEEN : LOGIKAL PROJECTS PTY LTD Plaintiff
AND
BENJAMIN RILEY
Defendant
Catchwords: Contract of employment - Validity of restraint of trade clause against two former employees - Turns on own facts
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Legislation: Nil Result: Action dismissed Representation: CIV 3643 of 2010 Counsel:
Plaintiff : Mr T Offer
Defendant : Mr M Holler
Solicitors:
Plaintiff : Lewis Blyth & Hooper
Defendant : AustAsia Legal Pty Ltd
CIV 3644 of 2010 Counsel:
Plaintiff : Mr T Offer
Defendant : Mr M Holler
Solicitors:
Plaintiff : Lewis Blyth & Hooper
Defendant : AustAsia Legal Pty Ltd
Case(s) referred to in judgment(s):
Attwood v Lamont [1920] 3 KB 571
Ausdale Enterprises Pty Ltd as trustee for the Lovett Family Trust v Sandford [2006] WASCA 191
Jones v Dunkel (1959) 101 CLR 298
Littlewoods Organisation v Harris [1977] 1 WLR 1472
Metcash Ltd v Jardim (No 3) [2010] NSWSC 1096
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Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535
Stephens v Kuhnelle (1926) 26 SR (NSW) 327
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1 GOETZE DCJ: LogiKal Projects Pty Ltd is a business consultancy operating in three areas. The first area is project management training. The second is advising business operators how to better improve their business and the third is to provide consultants who attend clients' businesses assisting in their project management.
2 Glenn Owen Dawson commenced employment with LogiKal on 4 August 2008 and Benjamin Riley commenced employment with LogiKal on 6 April 2009. 3 Each of Mr Dawson and Mr Riley signed an employment contract with LogiKal. There was an identical restraint of trade clause in their respective employment contracts, such clause being as follows: 31. Additional conditions These conditions below override any previous conditions of employment. During the term of the contract and for the following specified periods following the termination of this contract, the Employee agrees that: a) For the following six (6) months, not to take on employment or enter into a commercial agreement of any type with parties introduced to whilst working with The Employer unless otherwise agreed by both parties of this contract, with a contractual agreement being reached to remunerate The Employer for losses. Unless otherwise agreed, this will be 50% of potential annual revenue generated by that person. b) For the following twelve (12) months not to attempt to recruit or enter into commercial arrangements with The Employer's staff or suppliers unless otherwise agreed by both parties of this contract with a contractual agreement being reached to remunerate The Employer for losses. c) For the following twelve months (12) not to attempt to contact or make offer to any of The Employer's clients or contacts the services of any other organisation. This does not preclude the Employee from taking direct employment with these organisations subject to the period specified in a). This offer is subject to the following Special conditions: No Special conditions. (Page 5)
4 After Mr Dawson commenced work for LogiKal, but before Mr Riley commenced to work for it, LogiKal entered into an agreement with Water Corporation to provide services to it. 5 In or about October 2008, LogiKal assigned Mr Dawson to work as a project analyst at Water Corporation's office assisting it with computer services. 6 In or about May 2009, LogiKal assigned Mr Riley to work at Water Corporation's office as a data entry person. 7 LogiKal's agreement with Water Corporation was due to expire in or about May 2009, but prior thereto, it was renewed by way of a new agreement for LogiKal to continue supplying services to Water Corporation. Thereafter, Mr Dawson and Mr Riley continued their work at Water Corporation pursuant to the new agreement. 8 In or about June 2009, Mr Riley's work status changed to that of project analyst. 9 On 2 November 2009, Mr Dawson and Mr Riley both gave one month's notice to LogiKal terminating their employment with it. 10 On 13 November 2009, Leyson Contracting Pty Ltd was incorporated. Leyson is a body corporate in respect of which Mr Dawson and Mr Riley were the sole directors and equal shareholders. 11 In November 2009, Water Corporation terminated the new agreement with LogiKal with effect from 2 December 2009. It had a contractual clause in that new agreement permitting it to terminate LogiKal's services on 14 days' notice. 12 Mr Dawson and Mr Riley both last worked for LogiKal on 2 December 2009. 13 On 3 December 2009, Leyson entered into a service contract with Water Corporation and commenced providing services to it utilising Mr Dawson and Mr Riley to provide those services. 14 LogiKal alleges that in so doing, Mr Dawson and Mr Riley both provided the same or similar services to Water Corporation as they had done when they were employed by LogiKal, such that they therefore breached cl 31 of their respective employment contracts with LogiKal. (Page 6)
15 Mr Dawson and Mr Riley deny such breach and say that they were each working in expanded and different roles when working for Leyson, but it is agreed between the parties that nothing turns on such expanded and different roles. 16 This case then requires determination of the validity of the restraint of trade clause in the employment contracts between LogiKal and Mr Dawson and Mr Riley respectively. 17 LogiKal's case is that the restraint clause prevents Mr Dawson and Mr Riley from undertaking their work through Leyson for Water Corporation. Mr Dawson and Mr Riley, on the other hand, have submitted that the restraint of trade clause is too wide and is therefore unreasonable, such that it should be struck down. 18 In Ausdale Enterprises Pty Ltd as trustee for the Lovett Family Trust v Sandford [2006] WASCA 191 [7] – [13], McLure JA set forth the requirements for determining the validity of a restraint of trade clause. She referred to Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535, 565 to the effect that: All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable – reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public. 19 McLure JA went on to say: (i) that to be enforceable, the restraint must be reasonable both in relation to the parties to the contract and in relation to the public interest; (ii) the onus is on the employer to prove that the restraint is reasonable; (iii) the restriction on employment must not exceed what is reasonably necessary for the protection of the restraining party, such that it is necessary to identify the interests of the party seeking to enforce the restraint. The restrictions (Page 7)
must be no more than is reasonably required to protect the employer's legitimate interests; and (iv) it is necessary to determine as a matter of law whether the restraint is reasonable. That the parties negotiated and agreed to such a restraint does not determine what is, or is not, reasonable, but the background to, and the circumstances of, the negotiations leading to a contract are relevant considerations in making a judgment. 20 The issue is whether Logikal, in requiring each of Mr Dawson and Mr Riley sign a restrictive covenant in the form of cl 31 as set out above, has sought to obtain only reasonable protection of its legitimate business interests against the eventuality of Mr Dawson and Mr Riley resigning from LogiKal and providing their services to Water Corporation. 21 The onus is on LogiKal to prove that the restraint is reasonable. 22 The parties do not disagree as to the law to be applied in this case. Their difference is as to the interpretation of cl 31. 23 Clause 31 must be construed according to the reasonable meaning of the words used in it, without regard to what may be the effect of such construction. The clause must be approached without reference to the question of its legality or illegality, such that if on the true construction of the clause, it can only be rendered a reasonable protection by the writing in of words or by the deletion of words, then it cannot stand: Littlewoods Organisation v Harris [1977] 1 WLR 1472, 1486. 24 Some parts of restraint clauses may be severed if the severed parts are independent of other clauses and can be severed without the severance affecting the meaning of the part remaining. This has sometimes been called the 'blue pencil test', but if severance of part of the agreement gives it a meaning and object different in kind and not only in extent, then the different parts of it cannot be said to be independent. This doctrine of severance only applies in a case where there is not really a single covenant, but there is, in effect, the combination of several distinct covenants, such that severance can be carried out without the addition or alteration of a word, but only in that case: Attwood v Lamont [1920] 3 KB 571. 25 In determining what is reasonable, the background and circumstances leading to the employment contracts and the interests which LogiKal sought to protect by those contracts are relevant matters. (Page 8)
26 In this case, LogiKal sent Mr Dawson and Mr Riley as its employees into the workplace of its client Water Corporation thereby enabling Mr Dawson and Mr Riley to have direct contact with Water Corporation personnel and to assist such personnel in Water Corporation's internal operations and management, so as to enable it to provide its services to its customers. In this way, Mr Dawson and Mr Riley were exposed to employees of LogiKal's client, Water Corporation, and potentially they could gain the confidence of such employees. 27 LogiKal would therefore seek to protect its business from Mr Dawson and Mr Riley going into the physical location of Water Corporation’s office premises and conducting LogiKal's work thereat, so that Mr Dawson and Mr Riley could not simply resign from their employment with LogiKal and, on the very next day, commence working for LogiKal's client Water Corporation in their personal capacities, or through a body corporate created by them. 28 The first task is to see if the restraint clause involves no more than is necessary to protect LogiKal's legitimate interests. In undertaking this task, the clause cannot be read down to avoid any impermissible overreach, but is to be construed without regard to its enforceability. 29 The first thing to observe is that cl 31 endures for the duration of the term of the contract of employment and then to three separate periods of time following termination of that employment. It does so in respect of three distinct subject matters as set out in cl 31(a), (b) and (c) respectively. Thus, the contract aims at wide coverage to restrict Mr Dawson and Mr Riley from: (a) taking on employment and entering into a commercial agreement of any type with parties introduced to Mr Dawson and Mr Riley whilst working for LogiKal; (b) attempting to recruit or entering commercial arrangements with LogiKal staff or suppliers; and (c) attempting to contact or offering to LogiKal's clients or contacts the services of any other organisation. 30 Restrictive covenants are generally directed at restricting former employees from providing competing services to their former employer's clients or customers. (Page 9)
31 Clause 31(a) restricts 'employment' or entry 'into a commercial agreement of any type'. These words do not attempt to only reasonably restrain those services referable to the nature of the work undertaken by Mr Dawson and Mr Riley during their employment with LogiKal, including whilst they performed their duties at Water Corporation. These words have a wider meaning in comparison to the services provided by Mr Dawson and Mr Riley as employees of LogiKal at Water Corporation. 32 Therefore, these words are too wide in their respective ordinary meanings to provide only reasonable protection to LogiKal. 33 Clause 31(a) also restricts Mr Dawson and Mr Riley from employment or entry into commercial agreements with 'parties introduced to whilst working with' LogiKal. This expression is again of wide import and is not limited to LogiKal's clients or client contacts as such, or even 'clients or contacts' as set forth in cl 31(c), for whom Mr Dawson and Mr Riley provided services when employed by LogiKal. 34 The need to reasonably protect a client or client contact from being poached by an employee or former employee is one thing, but to seek to protect a party who has merely been introduced to a LogiKal employee goes beyond what is reasonable. For instance, Mr Dawson and Mr Riley may have been introduced to a party for only a matter of seconds. The party may not be a client or client contact, of if they were, Mr Dawson and Mr Riley may never have worked for, or have had any opportunity to become familiar with, that client or client contact or to have obtained any information about that client or client contact which LogiKal might find it necessary to protect. 35 Further, a party to whom an employee may have been simply introduced may not be a client or client contact of LogiKal's at all, or a client or client contact over whom that employee has any influence at all, and the LogiKal employee may not be an employee in whom the party, not necessarily a client or client contact, has any confidence, for the simple reason that they have only been introduced in a limited social/business situation without any opportunity to exert influence over, or to obtain the confidence of, the client or client contact. 36 In Stephens v Kuhnelle (1926) 26 SR (NSW) 327, a covenant purporting to extend to the customers of a baker who had not been served by an employee during his employment was held to be wider than was necessary for the protection of the employer. The wording of the (Page 10)
covenant could not be read down so as to save it. Here, cl 31(a) is of a similar, but not the same, kind. 37 In the circumstances, cl 31(a) seeks to protect 'parties', not merely clients or client contacts and as such, it seeks to protect more than is reasonably necessary. 38 Additionally, cl 31(c) goes beyond LogiKal's clients, and seeks to also protect its 'contacts'. It is one thing to be a client contact within a large corporate client, such as Water Corporation, but it is another thing to be a mere contact who is neither an existing client nor even a possible future client of LogiKal's and there may be, in reality, nothing to reasonably protect in respect of such contact. 39 Further, LogiKal contends that the agreement between Water Corporation and Leyson is 'a commercial agreement of any type' but clearly, as a matter of law, the entry into the commercial agreement between Leyson and Water Corporation is not the entry into a commercial agreement by Mr Dawson or Mr Riley. Clause 31 is directed to them in their personal capacity. Clause 31(a) does not attempt to prohibit the entry into a commercial agreement of any type by a body corporate of which Mr Dawson or Mr Riley are the directors and shareholders unlike cl 31(c), which will be further considered below. 40 What is really required by cl 31(a) is the protection of LogiKal's clients from poaching, both during an employee's employment and for a reasonable period subsequent to the termination of that employee's employment. 41 The fact that the restraint in cl 31(a) applies, at face value, 'unless otherwise agreed' does not assist LogiKal. It might simply refuse to agree and rely on the terms of the sub-clause. By reason that the purpose of a restraint clause is to protect the employer and to guard against loss to the employer, reference to the measure of loss in the sub-clause does not assist the interpretation of it. In passing, it is to be noted that such measure of loss is limited to cl 31(a) and has no impact on cl 31(c) in any event. 42 Clause 31(a) provides for a restraint period of six months. Some time restraint after Mr Dawson and Mr Riley had each finished working for LogiKal is reasonable so that their influence over Water Corporation would wane and some time was also required to enable LogiKal to obtain and introduce a replacement employee at Water Corporation, who then (Page 11)
has a sufficiently reasonable time during the period of restraint to create a working relationship with, and gain the confidence of, Water Corporation. 43 The only evidence as to this came from Mr Petrus Pruyn, the general manager of LogiKal that a named former employee of LogiKal, used to work for it on secondment at Water Corporation providing data processing services. The employee's services were terminated by LogiKal and Mr Riley was substituted to perform that role. Mr Riley was apparently able to obtain the confidence of Water Corporation within a few months and on that basis, proof to the required level of satisfaction that a period of six months for cl 31(a) was required has not been made out. Of course, for a more senior role, the period required for a former employee's influence over a customer to wane whilst a new employee gains the confidence of a client may be longer than a few months. However, there is no other evidence that a six month period was required. 44 Clause 31(b) deals with commercial arrangements with LogiKal staff or suppliers, neither of which are relevant in this case. 45 By cl 31(c), the restriction is 'not to attempt to contact or make offer to any of [LogiKal's] clients or contacts, the services of any other organisation'. 46 Reference has already been made to the different concepts of LogiKal's clients, client contacts and contacts. The word 'contacts' is of wide import. This should be considered further in the context of whether or not the employee has ever provided services for, or even met, such client or client contact as distinct from a mere contact. The word 'contact' goes beyond a client or client contact at a client's business over whom the employee may have influence or in whom a client or client contact might have confidence by reason of that employee providing services for the client and in doing so, perhaps dealing with a client contact. 47 The word 'contacts' in cl 31(c) cannot be read down so as to avoid any impermissible overreach. 48 Further, the term 'services' is a completely unqualified expression being of wide import and going beyond only the nature or kind of services previously provided by Mr Dawson and Mr Riley to Water Corporation when they were employees of LogiKal. 49 Next, there is reference to 'any other organisation'. Again, this is a concept of wide import, which cannot be read down in any logical manner to just refer to Mr Dawson and Mr Riley. (Page 12)
50 It is appropriate to remember that the consequence of giving reasonable meaning to the wording of the clause is that, if the words used are too wide, in that they seek to protect more than is reasonably necessary, then they may be unenforceable. It is not appropriate to reconstruct the clause in determining its validity. 51 The same comments above as to the restraint period of six months in cl 31(a) can also be made with respect to the restraint period of 12 months in cl 31(c). 52 It would have been easy to draft a restraint clause which reasonably protected LogiKal's business interests in a more limited manner specific to Mr Dawson and Mr Riley in the performance of their duties for LogiKal's clients for whom they provided services, rather than one which relates to a commercial agreement of any type or to offer the services of any other organisation which would for example, at face value, prevent Mr Dawson and Mr Riley and/or any other organisation with which they might be associated from offering to read residential water meters for Water Corporation. Clauses 31(a) and (c) would both prevent Mr Dawson, Mr Riley and/or Leyson from so doing. LogiKal would have no reasonable business interest to protect in preventing Mr Dawson, Mr Riley and/or Leyson from being meter readers. 53 In considering the above, the object of LogiKal was clearly to prevent the situation in which its employees establish relationships and gain the confidence of LogiKal's clients and client contacts and hence being able to influence them in terms of where those clients might direct their future work in the event of such employee subsequently leaving LogiKal's employment and endeavouring to obtain, or being offered without solicitation, that client's work for him or herself, either directly or indirectly, or for his or her new employer. 54 It is necessary to bear in mind this object or intention of LogiKal to protect LogiKal's legitimate interests and to thereby restrict the employment opportunities of its former employees, but cl 31(a) and cl 31(c) each go beyond what is reasonably necessary to protect LogiKal's interests. The restraints are not reasonable as a matter of law. This can be seen from the reasonable meaning of the words used therein. 55 These three sub-clauses of cl 31 are not stated, within their terms, to be separate and independent of each other so that one or other can be severed. However, each is aimed at a separate matter so as to provide a broad prohibition as a whole, such that severance of the whole of a (Page 13)
sub-clause would materially detract from what cl 31 seeks to achieve as a whole. This is to be contrasted to the severance of cascading clauses all relating to the same subject matter, but differing in terms of time and distance. 56 In any event, it is not possible to sever single words or phrases detailed above from within cl 31(a) or cl 31(c) because to do so renders the rest of such subclauses completely meaningless. There is nothing capable of being struck out with a blue pencil. Likewise, it is not permissible to write in words to aid or qualify the construction of those sub-clauses in favour of LogiKal so as to achieve the protection LogiKal might reasonably seek. 57 There is no evidence that Leyson was incorporated for the sole or dominant purpose of avoiding the consequences of cl 31: Metcash Ltd v Jardim (No 3) [2010] NSWSC 1096 [67]. It was not pleaded that such was the case and in that circumstance, the fact that neither Mr Dawson nor Mr Riley gave evidence, so that they could be cross-examined about it, does not assist LogiKal. No other evidence was led or sought to be given by LogiKal about such matter and in this circumstance, it is not open to LogiKal to rely on Jones v Dunkel (1959) 101 CLR 298 to seek to infer that Leyson was incorporated for the sole or dominant purpose of avoiding the restraints of cl 31. There may well have been other reasons for the incorporation of Leyson, such as the use of it as a corporate trustee for family trusts for Mr Dawson and Mr Riley. 58 The evidence is that LogiKal attempted to negotiate higher remuneration for the services to be provided by it under the new agreement. LogiKal instructed Mr Dawson to carry out that negotiation. Whether the termination of the new agreement by Water Corporation arose out of that attempt is not known. 59 There is no direct evidence connecting LogiKal's loss of Water Corporation's business with the conduct of either Mr Dawson or Mr Riley. On the evidence, I am not prepared to draw any inference that it was. 60 In these circumstances, there is a lack of evidence proving causation and giving rise to a claim for damages. 61 For these reasons, cl 31 is not enforceable and LogiKal's claim must be dismissed.
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