McLean Delmo Pty Ltd v GEO Corporation Pty Ltd and Georgiou
[2012] VCC 511
•3 May 2012
`
| IN THE COUNTY COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL
GENERAL DIVISION
Case No. CI-09-04310
| McLEAN DELMO PTY LTD | Plaintiff |
| (ACN 074 642 587) | |
| v | |
| GEO CORPORATION PTY LTD (ACN 050 197 290) | First Defendant |
| and | |
| GEORGE GEORGIOU | Second Defendant |
---
JUDGE: | HIS HONOUR JUDGE GINNANE | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 22- 25 August 2011 | |
DATE OF JUDGMENT: | 3 May 2012 | |
CASE MAY BE CITED AS: | McLean Delmo Pty Ltd v GEO Corporation Pty Ltd & Georgiou | |
MEDIUM NEUTRAL CITATION: | [2012] VCC 511 | |
REASONS FOR JUDGMENT
---
CONTRACT – accountant – engaged through family trust company – restraint of trade covenant – liquidated damages clause
FIDUCIARY DUTIES – whether owed by independent contractor - effect of termination of agreement – whether confidential information used in breach of agreement - acquiescence and delay
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr R A Millar | Hall & Wilcox |
| For the Defendants | Mr T Wodak | MAE Lawyers |
HIS HONOUR:
1 McLean Delmo Pty Ltd (McLean Delmo)[1], the plaintiff, conducts an accounting practice. Mr George Georgiou, the second defendant, has been an accountant for over 30 years. GEO Corporation Pty Ltd (GEO Corporation), the first defendant, is the trustee of Mr Georgiou’s family trust, the G & M Georgiou Family Trust. He owns all the shares in it.
[1]McLean Delmo Pty Ltd was formerly known as McLean & Delmo Pty Ltd and McLean Delmo Hall Chadwick Pty Ltd.
2 In November 2005, Mr Georgiou commenced performing audit work for McLean Delmo pursuant to an Independent Contractor Agreement. In March 2008 McLean Delmo terminated that Agreement.
3 McLean Delmo sues GEO Corporation and Mr Georgiou for breach of a restrictive covenant contained in the Independent Contractor Agreement and for breach of fiduciary duties owed to it by misusing confidential information of McLean Delmo and canvassing and soliciting clients of McLean Delmo with a view to soliciting for themselves the business of those clients in competition with McLean Delmo.
4 On 17 August 2011 Judge Lacava made orders by consent that subject to any order of the trial judge, the trial of the proceeding be split as follows:
(a) the trial commencing on 22 August 2011 be on the question of liability, and quantum only to the extent that it can be dealt with on the admitted facts;
(b) any assessment of damages not within (a) be referred for separate determination, if required, pursuant to Order 51 of the Rules of Civil Procedure.
5 The issues arising for determination in this proceeding are:
(a) was Mr Georgiou bound by the Independent Contractor Agreement?
(b) is the restrictive covenant enforceable?
(c) did the defendants breach the restrictive covenant?
(d) were the liquidated damages payable for breach of the restrictive covenant a penalty?
(e) did the defendants breach their obligations in respect of McLean Delmo’s confidential information?
(f) did GEO Corporation and Mr Georgiou breach fiduciary duties that they owed to McLean Delmo?
(g) did McLean Delmo know of, or acquiesce in, the conduct of the defendants which it alleges breached fiduciary duties owed to it, so as to disentitle it to relief?
6 These issues are to be decided taking into account the following facts.
The recruitment of Mr Georgiou and the Independent Contractor Agreement
7 McLean Delmo had six equity partners and six salaried partners, one of whom was Mr Georgiou, and about seventy staff.
8 Mr J Delmo, the managing partner of McLean Delmo, gave evidence that Mr Georgiou was recruited to help market the firm’s small audit division to potential clients. Mr Georgiou requested to be engaged through an independent contractor arrangement involving GEO Corporation. In cross- examination Mr Georgiou said that that arrangement was Mr Delmo’s idea. It was tax effective and for both parties and suited McLean Delmo and him. However I find that the arrangement was principally Mr Georgiou’s idea. It was attractive to him for the taxation benefits that he sought to gain from it. He used that structure again in his later work with United Dairy Power Pty Ltd.
9 The recital to the Independent Contractor Agreement stated that:
A. The Contractor is engaged in the business specified in Item 2 of the Schedule.
B. McLean Delmo has requested the Contractor to provide the Services (as defined in Clause 1.6).
C. The Contractor agrees to engage the Nominated Person (as defined in Clause 1.4) to perform the Services on the terms and conditions set out in this Agreement.
10 The Contractor was GEO Corporation. The Nominated Person was Mr Georgiou, The business specified was the provision of business, assurance and management consulting services. The services were described as:
“The provision of business, assurance and management consulting services to clients of McLean Delmo and Related Entities.
Specific details of the Services required and the competencies and qualities of the Nominated Person are included in an Attachment to this Agreement.
Further specific Services will be advised to the Contractor from time to time by McLean Delmo.”
11 The Schedule to the Agreement stated that:
“The Services shall be conducted by the Contractor for the Payment of $135,000.00 per annum via the issue of a discretionary income unit from the McLean Delmo and Partners Unit Trust No.2.
A further distribution of $35,000.00 will be paid on a lump sum basis subject to the production of fees of $150,000.00 by 7 November 2006, provided that this Agreement has not been terminated prior to 30 June 2006.
The Payment is inclusive of any superannuation benefits that the Contractor may request McLean Delmo to pay on behalf of the Nominated Person.”
12 Attached to the Independent Contractor Agreement was a two page Nominated Person Acknowledgement Form signed by Mr Georgiou and also dated 7 November 2005. The relevant clauses of that Form provided:
“1I have been nominated by GEO Corporation Pty Ltd ATF the G&M Georgiou Family Trust (‘the Contractor”) as a Nominated Person under the terms of an Independent Contractor Agreement (“the Agreement”) between the Contractor and McLean Delmo & Partners Pty Ltd (“McLean Delmo”), a copy of which is attached.
2I have read the terms of the Agreement and I have had the opportunity to obtain legal advice in relation to it. Save where inconsistent with the terms of this acknowledgement, the expressions set out in the Agreement apply in this acknowledgement.
3I understand and confirm that the Agreement imposes obligations on the Contractor and Nominated Persons and that by signing this acknowledgement, I agree to be bound by those obligations.
4I agree to perform the Services as defined in the Schedule to the Agreement and in accordance with the terms of the Agreement.
5McLean Delmo will make all payments in relation to the performance of services under the Agreement directly to the Contractor.
6I agree to abide by all McLean Delmo’s policies provided or made available to me, including policies dealing with the appropriate use of information technology, internet and telephone systems, harassment, discrimination, equal opportunity and OHS. I understand that a breach of these policies may result in the immediate termination of the Agreement.”
13 The Agreement was drafted by McLean Delmo’s solicitors.
14 The Independent Contractor Agreement contained a restrictive covenant, which was in the following terms:
“13. NON SOLICITATION
13.1To reasonably protect the goodwill of the business of McLean Delmo, the Contractor and the Nominated Person agree that:
13.1.1.This clause shall have effect as if it consisted of several separate promises and restraints consisting of each separate promise and restraint set out in Clause 13.1.2 combined with the periods of time set out in Clause 13.2 and of each such separate combination combined with the areas set out in Clause 13.3 and if any of these several separate covenants and restraints are or become invalid or unenforceable for any reason then that invalidity or unenforceability will not affect the validity or enforceability of any of the other separate covenants or restraints;
13.1.2Without the prior written consent of McLean Delmo, they will not (whether on their own behalf or on behalf of any other person or company) for the periods and within the area specified in this clause:
(a)canvas, induce, encourage or solicit any employee or contractor of McLean Delmo to leave the employment or engagement of McLean Delmo; or
(b)canvas, approach or accept any approach from any client of McLean Delmo (including existing clients and potential clients with which McLean Delmo or any employee, agent or servant of McLean Delmo has held discussions or provided proposals regarding the provision of services by McLean Delmo) with the view of soliciting for themselves the business of that client in competition to McLean Delmo.
13.2. The periods of time are:
(a) 24 months
(b) 18 months
(c) 12 months;
(d) 9 months, and
(e) 6 months
from the date of termination of this Agreement.
13.3. The areas are:
(a) Victoria; and
(b) Metropolitan Melbourne.
13.4. If the Contractor or the Nominated Person breach their obligations set out in Clause 13.1.2(b), the Contractor or the Nominated Person (as the case may be) may be required (at the election of McLean Delmo) to pay McLean Delmo an amount equal to 100% of the gross annual fees paid or payable by the client concerned to McLean Delmo over the 12 month period prior to termination of this Agreement. The Contractor and the Nominated Person warrant that this payment is a genuine pre-estimate of the probable damage to be suffered by McLean Delmo in the event of breach of Clause 13.1.2(b).”
15 Mr Georgiou signed both agreements. In the case of the Independent Contractor Agreement he signed for GEO Corporation.
McLean Delmo terminates the Independent Contractor Agreement
16 Mr Delmo, gave evidence that by March 2008 Mr Georgiou’s performance was unacceptable. The partners felt that he was unaccountable for his time and questioned his ability to generate new clients. They felt that he was, to some extent, undermining the equity partner in charge of audit services. His work was not profitable for the firm. McLean Delmo had acquired the practice of Hall Chadwick accountants. The firms’ audit divisions were merged and the McLean Delmo audit division moved into a city office. It was decided to make Mr Georgiou redundant.
17 Mr Delmo met with Mr Georgiou on Thursday 20 March 2008 and told him that that things were not working, that the partners had lost confidence in him, that the generation of fees expected had not happened, that there were some issues with his position within the new audit division and that he was redundant. He handed him a letter which stated:
“As you are aware, McLean Delmo & Partners Pty Ltd has, since 7 November 2005, engaged your services as an independent contractor to provide business, assurances and management consulting services to clients of McLean Delmo and related entities.
The company has made the decision that your performance does not warrant continuation of the agreement. Accordingly, we now provide you notice that the independent contractor relationship between us will cease.
In accordance with Clause 11.1 of the independent contractor agreement between McLean Delmo & Partners Pty Ltd and GEO Corporation Pty Ltd as trustee for the G & M Georgiou Family Trust, we have decided to provide you with a payment equal to 1 month’s salary in lieu of 1 month’s notice. As such your contractor agreement is terminated effectively immediately.
I remind you of your continuing obligations under Clause 12 of the independent contractor agreement.
Please ensure that you return to our office immediately the following items:
1All customer files in your possession that are to remain the property of McLean Delmo & Partners Pty Ltd.
2All other company property including equipment, documentation, etc, in your possession.”
18 Mr Georgiou was given a second letter concerning his entitlements.
19 Mr Georgiou asked whether Mr Delmo was going to walk him out of the office. Mr Delmo’s evidence was that he replied “no, of course not”[2]. It was arranged that he would finish on the following day 21 March
[2]Transcript (“T”) 25
20 Mr Georgiou returned to clear out his desk the following day, Friday 21 March.
Mr Georgiou’s dealings with Mr Esposito and United Dairy Power Pty Ltd
21 After his meeting with Mr Delmo, later on 20 March, Mr Georgiou spoke to Mr Antonio Esposito. He is the managing director of United Dairy Power Pty Ltd (UDP), which is part of the 5 Star Group. UDP supplies milk ingredients to milk and ice cream manufacturers. Mr Georgiou had known Mr Esposito for some time and introduced him as a client to McLean Delmo. While he was at McLean Delmo, Mr Georgiou provided audit services to Mr Esposito’s companies. McLean Delmo also provided general business, consulting services and tax compliance services to UDP.
22 There was a dispute in evidence as how Mr Georgiou contacted Mr Esposito on 20 March.
23 Mr Esposito’s evidence was that he met Mr Georgiou by pre-arrangement at his bank where Mr Georgiou was to help him deal with financial matters. Mr Georgiou was in shock and told him what had happened in his meeting with Mr Delmo. Mr Esposito, who regarded himself as a friend of Mr Georgiou, told him:
“Look, don’t worry don’t worry about it. We’re expanding our business and we’ll take you on into our company.” [3]
[3]T 44
24 No terms of any engagement of Mr Georgiou were decided on that day, but Mr Esposito was confident that a deal had been done.
25 Mr Georgiou’s evidence was that the meeting at the Bank, to which Mr Esposito referred, occurred the following week. He gave evidence that, on 20 March 2009, he went to Mr Esposito’s office at South Melbourne and told him what had happened in his meeting with Mr Delmo. Mr Esposito told him to go home, collect his thoughts and that they would have a chat later.[4] The next day, he went to Mr Esposito’s office and spoke about the role he would play if he was to join UDP. He considered that UDP required a Chief Financial Officer. Mr Esposito thought that he was the ideal person to take on the role. It appears that UDP did not then have such an officer.
[4]T 88, 129
26 Nothing ultimately turns on which version of the initial contact between Mr Esposito and Mr Georgiou was correct. However, I consider it more probable that Mr Georgiou would have a more vivid and accurate account of the events of 20 March 2008 than Mr Esposito would. Mr Georgiou’s evidence on this point is therefore more likely to be accurate.
27 Mr Georgiou and Mr Esposito met again in the following week. They quickly settled the arrangements on which Mr Georgiou would work as the Chief Financial Officer of UDP. Mr Georgiou was to work as an independent contractor through GEO Corporation for three days a week.
28 At some point, either in the week commencing 24 March or 31 March, Mr Georgiou commenced work as the Chief Financial Officer for UDP. Both parties put the commencement date, at least formally, as 1 April 2008.
29 The duties of the Chief Financial Officer included providing business advice and advising on strategy, structuring financial arrangements and dealing with banking issues.
30 The agreement for Mr Georgiou to work for UDP was later formalised in a document entitled, “Executive Consultancy Agreement” made between UDP and GEO Corporation and Mr Georgiou and dated 1 July 2008. GEO Corporation was described as the Consultant and Mr Georgiou as the Key Person. The recital provided that:
“A [UDP] appoints the Consultant to provide the Executive Services and the Consultant agrees to the appointment on the terms and conditions set out in this Agreement.
B The Consultant will engage the Key Person to assist the Consultant to provide the Executive Services.”
31 The Executive Services to be provided were defined as:
“Fulfil the position of Chief Financial Officer for the Company including undertaking duties associated with the position, including but not limited to, organising and overseeing the day-to-day operations of the Company and expansion of the Company and its related entities.
The Key Person will be responsible for all corporate, financial and governance functions as directed by the Chief Executive Officer of United Dairy Power from time to time.
The Key Person will undertake the following duties and responsibilities:
- Liaise with the Board and stakeholders.
-Supervision of Finance Manager.
- Assist with the implementation of controls and procedures.
- Management of risks and exposure, cash flow, planning, budgeting, monthly reporting.
-Liaise with external accountants and auditors.
- Complete any statutory reporting and comply with any regulatory compliance required.”
32 The Executive Consultancy Agreement provided for UDP to pay fees of $150,000 per annum to the Consultant.
UDP ends it audit relationship with McLean Delmo
33 On 27 March 2008, Ms Paula Barry, the financial controller of UDP, wrote to McLean Delmo Hall Chadwick stating:
“We wish to advise that the Board of 5 Star Foods Pty Ltd has nominated to change accounting firms. We are providing one month’s notice, as of today.
Please advise of any matters that need to be resolved prior to 30th April 2008.”
34 There was considerable evidence about this letter. Mr Georgiou gave evidence that soon after he commenced work Mr Esposito said:
“well, you’re no longer there at McLean Delmo. I don’t know anybody there so we’ll need to move on. Change accountants.” [5]
[5]T 90
His evidence of his response to Mr Esposito was :
“No, all I said was I’ve left there, the audit manager is leaving and also the tax manager, Shane Orr was leaving, so the people that were working on his files had left or were about to leave, so he had no-one there with knowledge of his files to continue to work on them.”[6]
[6]T 91
35 Mr Esposito gave evidence that after Mr Georgiou commenced work they discussed the question of UDP continuing to deal with McLean Delmo. Mr Georgiou told him that they had lost their senior auditor and he didn’t see that they had someone that would replace him. Mr Esposito saw a “relationship issue” between Mr Georgiou and McLean Delmo and he left it to Mr Georgiou to appoint another auditor[7]. Ultimately the Webb Group Australia Pty Ltd (Webb Group Australia) was appointed.
[7]T 46
36 Ms Barry gave evidence about the preparation of the letter. She stated that Mr Georgiou came to her with a handwritten version of the letter and asked her to type it and sign it. He told her that Webb and Co, accountants, were being appointed the auditors of UDP. Ms Barry typed the letter and sent it by post to McLean Delmo Hall Chadwick.
37 Mr Georgiou denied that he was involved in preparing the letter. He said that Mr Esposito told him that he had instructed Ms Barry to send the letter. He said there were errors in it which would not have been there if he had written it. He stated that he was not interested in changing UDP’s accountant. He had not commenced work at 27 March 2008 and therefore it was improbable that he would have drafted it. Mr Esposito gave evidence was that he had nothing to do with the letter.
38 The defendants’ counsel submitted that the Court should be cautious in accepting Mr Esposito’s evidence because he bore substantial animus towards Mr Georgiou and sought to portray him in as negative light as he could. Ms Barry was eager to say what was expected of her by Mr Esposito. Before Ms Barry was called to give evidence, Mr Esposito had told her of the evidence he had given earlier in the trial, despite the Court having made an order for witnesses out of Court.
39 However I accept Ms Barry’s evidence about the letter. Even though Mr Georgiou’s official commencement date as Chief Financial Officer was said to be 1 April 2008, he was present at UDP’s offices on a number of occasions before that date. The probabilities are that the mechanics of terminating the client relationship with McLean Delmo were left to Mr Georgiou. It is less probable that either Ms Barry or Mr Esposito would have drafted the letter, when Mr Georgiou who had been providing their audit and accountancy services had commenced, or was about to commence, work with them. I do not consider that Ms Barry’s conversation with Mr Esposito before she gave her evidence affects her credibility.
40 Between March and June 2008 Mr Georgiou acted as UDP’s accountant.
Mr Georgiou’s agreement with the Webb Group Australia
41 On 1 May 2008, Mr Georgiou signed two agreements. The first was a Consultancy Agreement made between Webb Group Australia Pty Ltd[8], who were a firm of accountants and Linxcorp Pty Ltd (Linxcorp) in its capacity as trustee of the PSM Unit Trust, and Mr Georgiou. Linxcorp was the trustee of a Georgiou family trust. Mr Georgiou owned all the shares in it. The commencement date of the Consultancy Agreement was 1 May 2008.
[8]Sometimes referred to in the evidence as Webb & Co.
42 Pursuant to the Consultancy Agreement, the consultant, Linxcorp, agreed to provide services to Webb Group Australia through the Nominated Person, Mr Georgiou. The services included the Nominated Person using his best endeavours to refer clients to Webb Group Australia. The consultant was to be paid commissions for introducing clients to Webb Group Australia. Item 6 of the Schedule to the Consultancy Agreement provided for commission to be paid to the Consultant in consideration for the Consultant and/or the Nominated Person, introducing clients, other than clients listed in Schedule 1 of the Sale and Purchase Agreement, to Webb Group Australia. The commission rates were: for accounting, tax, audit and consulting clients, 30% one-off commission of the annual recurring fee; for financial planning clients, 25% one-off commission of the annualised fees; for capital markets clients, 20% one-off commission of the net revenue earned by Webb Capital Markets; for insurance clients, 30% of upfront commission received and in the case of referrals from the Hall Chadwick association, 10% of annualised fees net of costs for the first year only.
43 The second agreement that Mr Georgiou signed on 1 May 2008 was a sale and purchase agreement. The parties to it were the same as to the first agreement. The second agreement recited that the vendor, Linxcorp Pty Ltd, carried on the business of providing accountancy consulting services to the clients, and owned the goodwill in the clients. It provided that the vendor agreed to sell, and the purchaser agreed to purchase, the goodwill in the clients on and subject to the conditions set out in the document. The agreement provided for a completion payment to be paid to the vendor of $200,000 exclusive of GST, as adjusted.
44 Attached to the second agreement was a list of businesses or entities under the heading “George Georgiou’s clients”. These included UDP and Greening Australia, which is a non-profit environmental organization. Next to the name of each of these businesses or entities was a column headed “WEBB AUDIT”, which listed a dollar figure for each client. For UDP the figure was “25,000.” The next column was headed “Acc/Tax” and recorded dollar figures for 8 clients. For UDP the figure was “20,000.” A third column was headed “Webb Capital Markets”. No figure was recorded in that column next to the name of UDP.
45 Mr Lindsay Holloway, the managing director of William Buck Victoria, which formerly traded under the names Webb Group and Webb and Co, signed both agreements as a director of Webb Group Australia[9]. His evidence was that the agreements were an arrangement between Mr Georgiou and Webb Group Australia whereby Mr Georgiou would bring clients and would receive payments as a result.[10]
[9]A second director also signed the agreements
[10]T 65, 67
46 UDP became a client of Webb Group Australia in June 2008 following Mr Georgiou’s introduction. Mr Georgiou stated that he had a discussion about targeting UDP before the agreements were executed[11]. Mr Holloway gave evidence that Mr Georgiou had been paid by Webb Group Australia for delivering UDP as a client. The payment was by a deposit on an overall arrangement and was to be reconciled at some point.[12]
[11]T 145-146
[12]T 65
47 On 7 July 2008 Mr S Crockett, Tax Director with Webb Group Australia, wrote what was described as an “ethical letter” to Mr I Duff, of McLean Delmo Hall Chadwick, who worked in its audit division, regarding 5 Star Foods Pty Ltd, UDP, United Dairy Transport Pty Ltd and UDI Pty Ltd stating:
“We have been approached by the above-named to attend to future taxation and accounting requirements and, accordingly, we ask if there is any reason, ethical or otherwise, why we may not accede to that request.
Assuming all is in order, we would appreciate your forwarding any documentation which you may be holding to our office…”
48 On 10 July 2008 Mr Duff replied to Mr Crockett stating:
“No ethical reasons.
All documents delivered to George Georgiou at UDP last week when final fees paid.”
49 Mr Georgiou answered questions in cross-examination about his relationship with Webb Group Australia after the Court advised him of his rights under s 128 of the Evidence Act 2008. He indicated that he wished to exercise his rights and I decided that he had reasonable grounds for his objections to answering the particular questions. I informed him that the Court would provide him a certificate under s 128 (5) of the Evidence Act if he willingly gave evidence in answer to the questions. He chose to do so and the certificate has been granted.
50 Mr Georgiou’s evidence was that he recommended Webb Group Australia to Mr Esposito because he considered that it was the best placed firm to undertake UDP’s work. He had a high opinion of Mr Luckins and Mr Crockett, who were members of that that firm. Mr Esposito acted on his recommendation. He discussed with Mr Luckins the idea of moving UDP to Webb Group Australia before the agreements dated 1 May 2008 were signed.[13] He said that he did not receive any payment for UDP becoming a client of Webb Group Australia.
[13]T 145-146
51 At a later point, UDP ceased being a client of Webb Group Australia and engaged other accountants.
Mr Georgiou leaves UDP
52 Mr Georgiou finished working with UDP in about May 2009. Mr Esposito gave evidence that his relationship with Mr Georgiou deteriorated. His reasons for this occurring were that a company credit card had been misused, a lot of accountancy work was going to external accountants and was costing the company more money and that Mr Georgiou did not want to work in the accounting area, but rather wished to be an adviser.
53 After Mr Georgiou left UDP, Mr Esposito found on Mr Georgiou’s computer a copy of the agreement between Mr Georgiou and Webb Group Australia and a letter to Greening Australia Ltd, which is an environmental organization. That letter was dated 28 April 2008 and listed as its authors the names of a person described as National Audit partner Hall Chadwick Australia and, also, Mr Georgiou, who was described as Audit Partner Hall Chadwick Australia. The letter stated that Mr Georgiou had left McLean Delmo, which in turn in April 2008 had left the Hall Chadwick association. It stated that Mr Georgiou had been appointed as the Melbourne representative of the Hall Chadwick national association and could continue as Greening Australia’s Engagement Partner.
54 Mr Esposito gave evidence that he had no knowledge that Mr Georgiou was acting as audit partner of Hall Chadwick Australia and had not given permission for the computer to be used to prepare the letter. His company sued Mr Georgiou and a settlement was reached. Mr Georgiou in turn gave evidence that Mr Esposito knew he was consulting to other companies and networks. So far as the letter to Greening Australia Ltd was concerned, Mr Georgiou said that McLean Delmo had left the Hall Chadwick association and that he was having discussions with Hall and Chadwick about becoming an audit partner, because they had no representative in Melbourne.
55 Mr Georgiou described a meeting with Mr Esposito in March 2009, in which Mr Esposito told him to get out of the office that afternoon. He attributed his departure from UDP to Mr Esposito’s stress caused by the Global Financial Crisis, the collapse of milk prices, the fact that he was in financial difficulties because there was no investment funds available to his businesses and the fact that he was in dispute with his partner[14]. Mr Georgiou sued for unfair dismissal and that proceeding was settled.
[14]T 104
56 On 4 June 2009, Webb Group Australia by its solicitors, sent a letter to Mr Georgiou giving notice of terminating the consultancy agreement from 6 July 2009. It also immediately terminated the sale and purchase agreement and sought the repayment of $104,000. Mr Georgiou has not repaid that sum
McLean Delmo’s knowledge of Mr Georgiou’s work with UDP
57 A significant issue in the proceeding was the extent of McLean Delmo’s knowledge of Mr Georgiou’s work with UDP.
58 Mr Georgiou gave evidence that McLean Delmo knew that he was working with UDP. He stated that on 1 April 2008 he sent a group email to a number of persons, whom he described as his network, that included Mr Delmo, other staff at McLean Delmo and at Hall and Wilcox, who are McLean Delmo’s solicitors. The group email stated that he had started work at UDP. He gave evidence that Mr Delmo by email:
“congratulated me and [said] ‘I believe its very appropriate. It’s a great position for you and please keep in touch and let’s have a coffee and a chat”.[15]
[15]T 100
59 That email was not produced, Mr Georgiou said that he had left it on his computer at UDP. Mr Delmo, having completed his evidence as part of McLean Delmo’s case, was permitted to give further evidence, in which he stated that he had no recollection of the email or making any response to it. He said that he did not correspond with Mr Georgiou at that time.[16]
[16]T 158
60 In the absence of the emails and in view of the conflict of evidence I am not satisfied that Mr Delmo received the group email or made a response to it.
61 Mr Georgiou gave evidence of a conversation with Mr I Duff who, as previously stated worked in the audit division of McLean Delmo, at a “coffee catch up” in which he told Mr Duff that a letter had already gone to McLean Delmo asking them to cease acting as UDP’s accountants. Mr Duff replied: “I understand that”.[17]
[17]T 119
62 On 15 June 2008, Mr S Orr, who was a manager employed by McLean Delmo, sent Mr Georgiou legal advice from Hall & Wilcox prepared in 2006 concerning the corporate structure of Mr Esposito’s businesses.
63 On 30 June 2008 Mr Orr emailed Mr Georgiou stating:
“I have forwarded the Esposito entities to you as we have not done much work on this side of the group. I will bring all the work we have done with me.”
64 Mr Georgiou gave evidence that in April 2009 Mr Duff visited him in his office and discussed his work with it.[18] Mr Duff still works for McLean Delmo, but was not called as a witness.
[18]T101
65 Mr B McFarlane a partner at Hall & Wilcox, who are McLean Delmo’s solicitors, had acted for UDP in a due diligence process, when private investors were considering investing in UDP. He gave evidence that Mr Georgiou told him that he had left McLean Delmo and joined UDP, but he was unable to recall when this occurred.
66 On 9 September 2008 Mr J Luckins of Webb Group sent an email to Mr Duff of McLean Delmo seeking access to McLean Delmo’s working papers in respect of the UDP audit for the financial year ending 30 June 2007. He stated:
“We are currently in the process of completing the 2008 audit, but need further information regarding the financial information for 2007 and work conducted on some of those numbers.”
67 In September 2008 Mr Georgiou provided instructions to Hall & Wilcox for the preparation of a contractor agreement in respect of his engagement with UDP.
68 Mr Georgiou stated that he received no complaint from McLean Delmo about his role with UDP until he received their solicitors’ letter in September 2009.
69 Mr Delmo gave evidence that he was aware that Mr Georgiou was working with UDP, but he was not sure when he became so aware. He was not aware of the ethical letter from Webb Group Australia.
70 Mr Demo gave evidence that Mr Esposito contacted him at some point in 2009 after Mr Georgiou had left UDP. Mr Esposito told him that he had terminated, or was about to terminate, Mr Georgiou’s services because he had received a commission from Webb & Co in respect of the transfer of UDP’s work to it. He gave him a copy of the letter addressed to Greening Australia, which was a longstanding client of McLean Delmo. Mr Delmo said that he was quite upset at this information. Mr Esposito also informed Mr Delmo that Mr Georgiou had said that McLean Delmo was not capable of performing the services required of their accountant and auditor and that was why he was recommending a change from McLean Delmo to Webb & Co. Mr Delmo was disappointed at this because McLean Delmo was capable of performing the UDP work. He regarded Mr Georgiou’s statements as defamatory. Mr Delmo discussed these matters with his partners and they decided to take legal action.[19]
[19]T 159
71 I will deal now deal in turn with each of the legal issues previously identified.
Issue 1 Was Mr Georgiou bound by the independent Contractor Agreement?
72 The first question is whether Mr Georgiou was bound by the Independent Contractor Agreement and whether McLean Delmo is entitled to enforce Clause 13.1.2 (b) of that Agreement against him.
73 McLean Delmo relied on the opening words of Clause 13.1 which state that “the Contractor and the Nominated Person agree”. They relied on the fact that paragraph three states:
“I understand and confirm that the Agreement imposes obligations on the Contractor and Nominated Person and that by signing this acknowledgement, I agree to be bound by those obligations.”
74 Mr Georgiou in cross-examination agreed that when he signed the form he understood that he was agreeing to be bound by the obligations that the agreement imposed on the Nominated Person.[20] However the legal effect of the agreement has to be determined objectively.[21]
[20]T 125
[21]Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165
75 McLean Delmo contended that Mr Georgiou was not a volunteer. Payments under the Agreement went to his trust company for distribution to members of his family. He received other benefits, personal in nature, including the reimbursement of expenses for mobile telephone calls, the payment of association membership, the provision of a company owned laptop computer and the ability to take leave. He was given the title of partner.
76 The defendants argued that Mr Georgiou was not a party to the Independent Contractor Agreement. It was a contract between McLean Delmo and GEO Corporation personally. They pointed to the cover sheet and the description of the parties and to the definition of the term “Agreement” in clause 1.1:
“Agreement means this Agreement between McLean Delmo and the Contractor (including the Schedules and the Attachments)”
77 The contractor was the company. Clause 4.1 states that the Contractor acknowledged that it would provide the services as an independent contractor and that nothing in the Agreement constituted the contractor or any nominated person as an agent or employee of McLean Delmo. Clause 4.2.4 provided that the contractor was solely responsible for controlling the manner in which the Nominated Person performed the services, subject to the provisions set out in the Agreement. Mr Georgiou was not an employee, or agent, of McLean Delmo, but the representative of an independent contractor of McLean Delmo. The parties could have entered into a tripartite agreement with Mr Georgiou as an additional party, but chose not to.
Conclusion on issue one
78 I consider that Mr Georgiou was bound by the terms of the Independent Contractor Agreement and can be sued for breach of it.
79 The McLean Delmo pleading, when read with the particulars, asserts that Mr Georgiou had obligations in part created by the Independent Contractor Agreement and in part by the Acknowledgement Form. The particulars to the relevant paragraph of the statement of claim state:
“The Contractor Agreement is in writing and is constituted by the Independent Contractor Agreement commencing 7 November 2005 together with the Attached Schedule and Nominated Person Acknowledgement Form dated 7 November 2005.”
80 The Acknowledgement Form expressly stated that Mr Georgiou agreed to be bound by the obligations contained in the Independent Contractor Agreement.
81 The Independent Contractor Agreement and the Nominated Person Acknowledgement Form are to be read together in order to ascertain the identity of the parties to the agreement that concerned McLean Delmo, the Contractor and the Nominated Person. The interposition of GEO Corporation between McLean Delmo and Mr Georgiou was done to obtain taxation advantages for Mr Georgiou. The reality was that Mr Georgiou agreed to perform audit work for McLean Delmo. For its part, McLean Delmo was concerned to protect its interests in its clients when Mr Georgiou ceased working for it.
82 Clause 13 of the Independent Contractor Agreement, which contains the Non Solicitation Covenant, expressly binds the Contractor and the Nominated Person. Clause 13.2 purports to make Mr Georgiou liable for liquidated damages if the restrictive covenant is breached.
83 Clause 9 of the Independent Contractor Agreement, which deals with confidential information and Clause 10, which deals with ownership of Intellectual Property Rights also expressly bind Mr Georgiou as the Nominated Person.
84 Mr Georgiou received consideration for the promises that he made both directly and indirectly. There is no requirement of contract law that the payments under the Agreement had to pass directly to him. He determined the manner in which the payments under the Independent Contractor Agreement would be made to his family trust company. He received some work related benefits.
85 Mr Georgiou was bound by the terms of the Independent Contractor Agreement and can be sued for breach of it.
Issue 2 is the restrictive covenant enforceable ?
86 The second issue is whether the restrictive covenant contained in clause 13 is enforceable.
87 McLean Delmo submitted that the covenant was no more than was reasonable for the protection of its legitimate interests in its clients. The defendants submitted that the McLean Delmo had failed to discharge the onus of establishing that the covenant was reasonable.
88 Clause 13 imposes a restraint of trade on GEO Corporation and Mr Georgiou by restricting their dealing with McLean Delmo’s clients, including potential clients. The onus is on McLean Delmo to satisfy the Court that the restraint is no wider than was reasonably necessary to protect its legitimate interests. The reasonableness of the restraint is to be judged at the date the Independent Contractor Agreement was made.
89 An employer is entitled to impose a restrictive covenant to provide reasonable protection of its business against ex-employees taking customers with them to a business, in competition with their former employer.[22]
[22]The propositions in this and the previous paragraph are taken from Hartleys Ltd v Martin [2002] VSC 301 and the authorities therein referred to, particularly Butt v Long (1953) 88 CLR 476 and Lindner v Murdock’s Garage (1950) 83 CLR 628
90 The justification for the protection of an employer’s legitimate interests by an appropriate restrictive covenant binding ex-employees can also justify the protection of a head contractor’s legitimate interest in protecting its clients. Working relationships structured on an independent contractor model have become increasingly common in all area of working life in recent decades, even when the relationship bears many features of an employment relationship. In appropriate circumstances, head contractors are entitled to prevent independent contractors, such as GEO Corporation and Mr Georgiou, who have served the head contractor in a manner akin to an employee, taking customers with them to a new business and there to compete with their former head contractor.
91 The scope of permissible restrictive covenants was summarised by Kitto J in Lindner v Murdock’s Garage[23] as follows:
“In these circumstances it is necessary to consider what it was for which, and what it was against which, the respondents needed protection: Herbert Morris v Saxelby. The answer is that they needed protection for their business connection against the possibility of its being affected by the personal knowledge of and influence over the customers which the appellant might acquire in their employment.”
[23]Supra at pp 653 - 654.
92 In Birdanco Nominees Pty Ltd v Money[24], the Victorian Court of Appeal emphasised the importance of identifying the client connection with the ex-employee and the extent to which the personal attachment between employee and customer was a significant part of the employee’s duties. That case concerned the validity of a restraint imposed by an accountancy firm on an accountant. Robson AJA, with whose judgement Maxwell P and Redlich JA agreed, stated:
“The interest that Bird Cameron seeks to protect is, essentially, the customer or ‘trade’ connection Bird Cameron has with those of its clients who deal directly with Mr Money. Such a ‘customer connection’ is a legitimate interest of the employer, capable of contractual protection. Latham CJ said in Lindner v Murdock’s Garage ‘[t]he interest which can validly be protected is the trade connection, the goodwill of the business of the employer.’
The trade connection created in accounting firms is well established. Clients of accounting firms tend to have a continuing relationship with employees of the firm. Those employees understand their clients’ book-keeping procedures and affairs. These are qualities that are attractive to clients and encourage their continued custom of the firm. The knowledge and understanding of the clients’ affairs is created by the employees of the firm that are providing the accounting services to the clients. I am using the term ‘employees of the firm’ to encompass those principals or employees who provide accounting services to the employees.’’[25]
[24][2012] VSCA 64
[25]Supra at [41] –[42]
93 Robson AJA referred to statements of Heydon J, made when writing extra judicially, that:
“[I]t is not enough for the employee simply to have contact with the customers. He says that ‘there must be some element in the employee-customer relationship which causes customers to rely on the employee and to regard the employee as the business to the exclusion of the employee.’”[26]
[26]Supra [46]
94 Many restrictive covenants restrain the employee from dealing, post employment, with customers of their former employer with whom they had contact in that previous employment.
95 McLean Delmo relied only on that part of the cascading restraint periods imposed by clause 13.2 (e) which fixed a period of time of 6 months from the date of termination of the Agreement. The defendants did not contest the plaintiff’s submission that clause 13.2 (e) could be treated as a separate restraint. I accept that it contains separate covenants that can be severed[27] see I. F. Asia Pacific Pty Ltd v Galbally[28].
[27]Intergrated Group Ltd v Dillon [2009] VSC 361 at [41]
[28][2003] VSC 192
96 The matters that appear relevant to the decision whether the restraint in clause 13 was valid are:
(a) the activity restrained, ie. the nature of the restraint;
(b) the duration of the restraint;
(c) the geographical coverage of the restraint;
(d) the consideration received;
(e) the bargaining power of the parties;
(f) the nature of the business and the nature of the employee or contractor’s role in it.
The Activity Restrained
97 Clause 13 commences by stating that it is directed at reasonably protecting the goodwill of the business of McLean Delmo. The relevant activities restrained are canvassing, approaching or accepting an approach from any client of McLean Delmo, with the view of soliciting for themselves the business of that client in competition to McLean Delmo. The term “Client” is defined to include existing and potential clients, with whom McLean Delmo or any employee, agent or servant of McLean Delmo, has held discussions, or provided proposals regarding the provision of services by McLean Delmo.
98 McLean Delmo submitted that the reference to “potential clients” was to a person who was “a live client prospect” and not to anyone who had ever been in discussions with McLean Delmo, but with whom a client relationship had not developed. A restraint could validly prevent a former contractor accepting an approach from a client of the former head contractor[29].
[29]Hellmann Insurance Brokers v Peterson [2003] NSWSC 242
99 The restraint did not have to be limited to clients with whom the defendants had prior contact: Cactus Imaging Pty Ltd v Peters[30]. McLean Delmo was a relatively small firm of 12 partners. Mr Georgiou was one of the partners, although a salaried rather than an equity partner, and was privy to information concerning the marketing and strategy of the firm. He was not merely engaged as an auditor..
[30][2006] NSWSC 717
100 The defendants submitted that the restraint was unreasonable. McLean Delmo did not require it in order to protect its business. It extended to potential clients. It also extended beyond clients with whom Mr Georgiou had dealt and applied to the clients of other partners and employees. It therefore restricted Mr Georgiou from dealing with clients of McLean Delmo, even if he had never dealt with them while he was at McLean Delmo. Mr Georgiou was primarily an auditor and had not worked in some areas of McLean Delmo’s practice such as the insolvency division. He would not have dealt with persons who were solely clients of that division.
101 The restraint was also unreasonable because it prohibited Mr Georgiou acting on unsolicited approaches from any client of McLean Delmo. It would also be unreasonable if, as McLean Delmo argued, it prevented him commencing work with UDP.
102 Little separate argument was put about whether clause 13 was invalid in restricting the activities of GEO Corporation. The submissions proceeded on the assumption that the same considerations applied in determining the effect of the restraint on GEO Corporation as on Mr Georgiou. That assumption reflected the reality that Mr Georgiou would be making any approaches to clients of McLean Delmo even if he was doing so on behalf of GEO Corporation.
103 GEO Corporation is the corporate vehicle by which Mr Georgiou provided services to McLean Delmo. The restraint affecting GEO Corporation sought to prevent it being used as a vehicle for Mr Georgiou providing accountancy services to former clients of McLean Delmo. A restraint affecting GEO Corporation has substance only as a means of preventing Mr Georgiou dealing with former clients of McLean Delmo. If the restraint against Mr Georgiou is invalid so must the restraint against GEO Corporation.
The duration of the restraint
104 The defendants did not suggest that that the six months restraint contained in clause 13.2 (e) was an unreasonable period. I consider it to be a reasonable period for a restraint that was otherwise valid.
The geographical coverage of the restraint
105 McLean Delmo relied on that part of the restraint which extended to Metropolitan Melbourne. The defendants did not contend that such a geographical coverage or scope was unreasonable.[31] I consider that that part of the restraint was reasonable.
[31]Cf Bearing Point Australia Pty Ltd v Hillard [2008] VSC 115 at [162]
The consideration received and the bargaining power of the parties
106 McLean Delmo argued that the defendants had bargaining power in negotiating the terms of the Agreement and received adequate consideration. It paid significant sums under the Agreement at Mr Georgiou’s direction. He was an experienced accountant and had negotiated the terms of his engagement. He preferred to work through contracting arrangements. He had adopted similar arrangements when he worked with UDP.
107 The defendants contrasted the one month’s notice on which the Independent Contractor Agreement could be terminated and the six months, being the minimum duration of the restraints contained in clause 13.2. Mr Georgiou already was an experienced accountant when he commenced work with McLean Delmo and not a junior accountant, who was likely to gain significant professional experience and benefit from his engagement. He was his family’s primary breadwinner.
The nature of the business and the role that the contractor/employee had played in it.
108 Mr Georgiou worked in UDP’s audit division and had introduced UDP as a client. McLean Delmo was a medium sized accountancy practice with many clients.
Conclusion on issue two
109 The restraints contained in clause 13.2 extended beyond providing reasonable protection of McLean Delmo’s interests in its clients and the goodwill attaching to them. McLean Delmo has not established that it was a reasonable restraint. First it extended to all clients, whether or not Mr Georgiou or GEO Corporation had had any previous contact with them. Second, the restraint included the imprecise concept of potential clients as part of the clients, who were to be protected. The restraint did not focus on reasonable protection of the clients, with whom Mr Georgiou had a connection when working with McLean Delmo.
110 It was not suggested that the restrictive covenant, if it was otherwise invalid, could be saved by severance.
111 I therefore conclude that the restraint contained in clause 13.2 was invalid. That finding means that it cannot be enforced against Mr Georgiou or GEO Corporation.
112 Although I have determined that the restrictive covenant was invalid, I will consider the other issues that were argued on the contrary assumption that it was valid. The breach of fiduciary duties claim is unaffected by the finding that the restrictive covenant was invalid.
Issue 3 did the defendants breach the restrictive covenant?
113 McLean Delmo’s case was that the restrictive covenant contained in clause 13 had been breached by the defendants because they:
“(a) misused confidential information of the plaintiff being information concerning the business requirements of clients; and
(b) have either on their own behalf or on behalf of other persons canvassed, approached or accepted any approach from clients of the plaintiff with a view to soliciting for themselves the business of those clients in competition with the plaintiff.
Particulars
In the period from on or about 20 March 2008 to on or about 1 April 2008, the first and/or the second defendant, either on their own behalf or on behalf of Webb & Co, canvassed United Dairy Power Pty Ltd (UDP) and 5 Star Foods Pty Ltd (5 Star), being clients of the plaintiff, with the view of soliciting for themselves the business of those clients in competition to the plaintiff, by:
(a) on or shortly after 20 March 2008 informing the Managing Director of UDP, Tony Esposito, that the plaintiff would struggle to provide its services to that company and its related entity 5 Star without the services of the second defendant and that he, the second defendant, would put Mr Esposito in touch with another firm;
(b) procuring UDP and 5 Star to provide notice of termination of their client relationship with the plaintiff by letter 27 March 2008…
(c) procuring UDP and 5 Star to use the services of the first and/or second defendant in competition to the plaintiff, with the first and/or second defendant commencing on or about 1 April 2008 as a consultant and/or Chief Financial Officer of UDP; and
(d) on a date not known to the plaintiff, but soon after 27 March 2008, procuring or expanding a client relationship between Webb & Co and both UDP and 5 Star to undertake business in competition with the plaintiff.”
114 I am satisfied that Mr Georgiou did make the suggestion described in (a) above. This conclusion is supported by the evidence of Mr Esposito, which I accept. Mr Georgiou’s accepted in evidence that he had told Mr Esposito that McLean Delmo “had no-one there with any knowledge of his files to continue to work on them.”[32]
[32]T91
115 I accept the evidence of Ms Barry and Mr Esposito about the letter referred to in particular (b). It is probable that the drafting of the letter was left to Mr Georgiou and that he did ask Ms Barry to type it and send it to McLean Delmo.
116 So far as (c) is concerned, I find that Mr Georgiou did commence working with UDP as its Chief Financial Officer no later than 1 April 2008.
117 So far as (d) is concerned, I find that Mr Georgiou did suggest to Mr Esposito that Webb Group Australia be engaged as accountants for UDP and that Mr Esposito acted on his recommendation, or authorised Mr Georgiou to so act. Webb Group Australia, (Webb & Co), did act in competition with McLean Delmo.
118 I find that in his conduct described in the first three paragraphs (a) to (c) set out above, that Mr Georgiou was acting on behalf of GEO Corporation and bound it by his conduct.
119 In respect of the conduct set out in paragraph (d), Mr Georgiou was acting on behalf of Linxcorp, which is not a party to the proceeding.
120 It is then necessary to determine whether the fact that I have found would have constituted breaches of clause 13.2 if it was otherwise valid.
121 The submissions of the parties on this issue focused on the effect of two parts of clause 13.1.2. First were the words appearing at the commencement of clause 13.1.2 which restricted the defendants “(whether on their own behalf or on behalf of any other person or company)” from acting in the manner prohibited by the clause. Secondly, was the phrase appearing at the end of clause 13.1.2 that provided that the conduct prohibited had to be engaged in “with the view of soliciting for themselves the business of that client in competition to McLean Delmo.”
122 McLean Delmo submitted that the phrase “on behalf of any other person or company” was capable of referring to actions taken in the interests of Webb Group Australia. The agreement between Linxcorp and Mr Georgiou and Webb Group Australia provided that Mr Georgiou would use his best endeavours to refer clients to it.
123 The defendants argued that clause 13.1.2 did not prevent Mr Georgiou making recommendations concerning the accountant that UDP should engage. In addition, GEO Corporation, as distinct from Linxcorp, had no dealings with Webb Group Australia.
124 The parties put the following submissions about the competition requirement that is contained in the final words of clause 13.1.2. McLean Delmo argued that Mr Georgiou and GEO Corporation and Linxcorp were in the business of providing accounting services. In addition, McLean Delmo’s business included providing business advice. Mr Georgiou’s role as Chief Financial Officer at UDP included providing the business advice that McLean Delmo previously provided. By acting as Chief Financial Officer with UDP, Mr Georgiou and/or GEO Corporation had accepted an approach from a client in competition with McLean Delmo. Between April 2008 and the date when Webb Group Australia commenced to act as UDP’s accountant, Mr Georgiou and GEO Corporation provided business advisory services to UDP. By entering into the agreements with Webb Group Australia, Mr Georgiou agreed to canvass persons, including former clients of McLean Delmo, to become clients of Webb Group Australia. In addition Mr Georgiou himself agreed to provide services to Webb Group Australia.
125 The defendants argued that McLean Delmo was not in competition with UDP and that in accepting engagement as Chief Financial Officer with UDP the defendants had not canvassed, approached or accepted any approach from UDP “with the view of soliciting for themselves the business of that client in competition to McLean Delmo.”
126 The defendants also argued that, in accepting the position of Chief Financial Officer with UDP and then advising UDP to end its relationship with McLean Delmo, they had not acted on behalf of any other person or company. They had not acted on behalf of Webb & Co.
Conclusion on issue three
127 The action of an employee in accepting employment with a client of his former employer does not usually mean that the employee is acting in competition with the former employer. Covenants in restraint of trade, like other contractual clauses, are to be construed in accordance with the natural and ordinary meaning of their words and with reference to the object sought to be obtained.[33] There are many circumstances in which one person can be said to be in competition with another person.[34] However, in this case, that phrase has to be read in the context of a commercial contract designed to protect a business against competition from a former worker. When the former worker commences work with a client of the former head contractor he would not normally be regarded as being in competition with the head contractor (McLean Delmo). That conclusion would be even clearer in a situation where a former employee moved to a new employer. However, it should make no difference that instead of employment, the former independent contractor and nominated person, purport to work through a trust company’s consultancy agreement or other form of contractor arrangement. A person working for a former client of his former employer is not working in competition with his former employer merely because he is providing services that his former employer previously provided. The role of a Chief Financial Officer, however structured by taxation motivations, is not in the requisite sense a role that competes with a professional firm of accountants providing services to a range of clients.
[33]Birdanco Nominees Pty Ltd v Money ,Supra, at [37]
[34]Cases referred to in argument by the plaintiff in which the meaning of the word “competition” was discussed included Adamson v West Perth Football Club Incorporated (1979) 27 ALR 475 and Woolworths Ltd v Banks [2007] NSWSC 45
128 The position may differ if the former contractor or employee was actually conducting a business and providing services to one or more clients of his former employer. Then the former employee or contractor might be acting in competition with his former employer or head contractor.
129 The evidence does not establish that merely by Mr Georgiou acting as Chief Financial Officer, that he, or GEO Corporation, were providing services in competition with McLean Delmo.
130 Mr Georgiou could not provide auditing services for UDP while he was its Chief Financial Officer, whereas he had provided those services to it while at McLean Delmo.
131 Mr Georgiou’s suggestion, or advice, that UDP end its relationship with McLean Delmo and that it would not be able to provide the required accountancy services would not by itself have breached the restrictive covenant. It was within the scope of his duties as Chief Financial Officer to provide such advice.
132 The involvement of Mr Georgiou and Linxcorp with Webb Group Australia takes the situation to a different level and requires separate consideration. By the time the agreements with Webb Group Australia were made, UDP was no longer a client of McLean Delmo.
133 However the evidence does support the conclusion that Mr Georgiou’s advice that UDP transfer its accountancy work to Webb Group Australia was made to obtain a benefit from the relationship that he had developed with that firm. Ms Barry’s evidence was that Mr Georgiou mentioned that Webb & Co was to become UDP’s auditor, when he asked her to type the letter of 27 March 2008 to McLean Delmo. At some point between 20 March 2008 and 1 May 2008, Mr Georgiou negotiated the terms of the Consultancy Agreement with Webb Group Australia. His evidence was that he was discussing with Webb Group Australia bringing UDP to it as a client before the agreement of 1 May 2008 was signed. The inference is clear that Mr Georgiou acted pursuant to an arrangement with Webb Group Australia in suggesting that the accountancy work be transferred to it. In so suggesting he was acting on behalf of Webb Group Australia, in the sense of acting for its benefit, as well as his own.
134 On one view it might be argued Mr Georgiou’s conduct was not undertaken with a view of soliciting for himself the business of UDP in competition with McLean Delmo. This is because once Mr Georgiou became the Chief Financial Officer of UDP, McLean Delmo was highly unlikely to remain as UDP’s accountant and therefore was not in competition with Webb Group Australia or Mr Georgiou for UDP’s work.
135 However such an approach would be to ignore the reality of what occurred. Mr Georgiou’s recommendation that the work be transferred to Webb Group Australia in circumstances where he was likely to benefit from that transfer was conduct with a view of soliciting for “ themselves” the business of UDP in competition with McLean Delmo within the meaning of Clause 13.1.2. The Clause must be read as a whole. The word “themselves” at the end of the clause refers not just to GEO Corporation and Mr Georgiou, but to any person on whose behalf they were acting and refer back to the opening words of the clause. Mr Georgiou was acting for Webb Group Australia, when he suggested the transfer of UDP’s work to that firm.
136 Therefore if the restrictive covenant had been valid, I would have found that Mr Georgiou’s conduct breached it.
137 The position of GEO Corporation is however different. McLean Delmo has not established that GEO Corporation’s conduct would have breached the covenant, if valid, by this conduct of Mr Georgiou. Mr Georgiou did not act on behalf of GEO Corporation when dealing with Webb Group Australia. He was acting on behalf of Linxcorp as the agreements reveal. Linxcorp is not a party to the proceeding.
Issue 4 Were the liquidated damages for breach of the restrictive covenant a penalty?
138 The next issue is the defendants’ submission that clause 13.4 was unenforceable as a penalty. It provided for liquidated damages to be paid if the restrictive covenant was breached. To repeat the terms of that sub- clause:
“ If the Contractor or the Nominated Person breach their obligations set out in Clause 13.1.2 (b), the Contractor or the Nominated Person (as the case may be) may be required (at the election of McLean Delmo) to pay McLean Delmo an amount equal to 100% of the gross annual fees paid or payable by the client concerned to McLean Delmo over the 12 month period prior to termination of this Agreement. The Contractor and the Nominated Person warrant that this payment is a genuine pre-estimate of the probable damage to be suffered by McLean Delmo in the event of breach of Clause 13.1.2 (b).”
139 The defendants admitted that the fees payable by the UDP group to McLean Delmo for the relevant 12 month period were $161,436.18[35].
[35]T 17 and 19
140 McLean Delmo argued that the loss of a client involved the loss of not just the profit from the current year’s fees from that client, but an ongoing loss of future income for the duration of the period during which the client was likely to have been retained. The clause used gross annual fees to fix an amount which was a genuine pre-estimate of the future profits, that would have been earned from the client. The McLean Delmo clients, with whom Mr Georgiou worked, were a valuable asset. Because clause 13.4 fixed damages by reference to one year’s gross annual fees, it was appropriate to take the gross fees for that year as a pre-estimate of damages. That figure represented a reasonable pre-estimate of the loss that was likely to be suffered over a longer period[36].
[36]The plaintiff relied on Challenge Finance Ltd v Forshaw (No 4) (1995) 217 ALR 264 at 276 and Tullett Prebon (Aust) Pty Ltd v Purcell [2009] NSWSC 1079
141 The defendants contended that McLean Delmo was better off without Mr Georgiou, because his work was not profitable and the audit practice was operating at a loss. That was one of the reasons why McLean Delmo terminated the Independent Contractor Agreement. Clause 13.4 provided for one penalty which was payable for all breaches of the covenant no matter what their nature. Using the figure of gross annual fees earned from the client was inappropriate.
142 The defendants referred to the statement in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd[37] which in turn was applied in Ringrow Pty Ltd v BP Australia Pty Ltd[38] that:
“There is a presumption (but no more) that it is penalty is a penalty when ‘a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage’ (authority omitted).”
[37][1915] AC 79 at 86-87
[38](2005) 224 CLR 656 at 662 [11]
Conclusion on Issue four
143 The onus is on the defendants to establish that the liquidated damages were out of all proportion to the loss McLean Delmo would suffer from a breach of clause 13.[39] The defendants have not established that.
[39]see Amev-Udc Finance Ltd v Austin (1986)162 CLR 170; Yarra Capital Group Pty Ltd v Sklash Pty Ltd [2006] VSCA 109 and Zachariadis v Allforks Australia Pty Ltd (2009) 26 VR 47
144 A figure of 75 per cent of the fees, incurred by the particular client with the employer for services rendered in the financial year immediately preceding the breach of covenant, has been upheld as liquidated damages in circumstances where the employer loses that client’s work because of a breach of the covenant: Birdanco Nominees Pty Ltd v Money[40].
[40]Supra [86] –[92[
145 The liquidated damages stipulated in clause 13.4 assume that the client would continue with McLean Delmo for at least one further year and probably longer. That assumption underpinning the pre-estimate of damages cannot be said to be out of all proportion to the loss that might be suffered by a breach of the covenant.
Issue 5: Did the defendants breach their obligations in respect of McLean Delmo’s confidential information
146 McLean Delmo also sues the defendants for misuse of its confidential information, being information concerning the business requirements of clients. This was particularised as the accounting and business advice needs of UDP and 5 Star.
147 The use of McLean Delmo’s confidential information is governed by Clause 9 of the Independent Contractor Agreement, which states:
9.1 Except as required by law, both during the Agreement and after termination of the Agreement the Contractor and the Nominated Person must not disclose or use any Confidential Information, other than in the proper performance of the Services, for either their own benefit or the benefit of anyone else, without prior written approval of McLean Delmo.
9.2 On termination of this Agreement the Contractor and Nominated Person must immediately deliver to McLean Delmo all originals and copies of any Confidential Information in their possession.
9.3 The Contractor acknowledges that damages may be inadequate compensation for McLean Delmo or a Related Entity if the Contractor or the Nominated Person breaches the obligations set out in this clause and that McLean Delmo or a Related Entity may restrain, by an injunction or similar remedy, any conduct or threatened conduct of the Contractor or the Nominated Person which is or may be a breach of this clause.
148 The term Confidential Information is widely defined. The parts of the definition, which appear relevant are:
“ ‘Confidential Information’ includes all information regarding the business, trade secrets and commercially valuable information of McLean Delmo and Related Entities, including:
1.3.1 client details, lists, proposals or agreements and information relating to clients’ practices, business dealings, trade secrets and affairs;
1.3.2 business plans, financial information, data and strategies;
…
1.3.5 techniques and methods of budgeting and marketing analysis;
…
1.3.7 any information or document which has been provided and/or made available to the Contractor or which has come to the Contractor’s attention during its engagement with McLean Delmo which, from its nature and content, is or would reasonably be expected to be confidential.”
149 McLean Delmo informed the Court that its case concerning misuse of confidential information was connected to its case of breach of fiduciary duties, which is the next issue considered.[41]
[41]T 291 and T303ff and plaintiff’s outline of submissions paragraphs 27 to 33 and cf T212 -215
150 The defendants argued that no confidential information as defined had been misused. No information that the law would protect as confidential had been identified. At best, McLean Delmo could only establish that Mr Georgiou had expressed the opinion to Mr Esposito that it was incapable of properly providing accountancy services to UDP.
151 While Mr Georgiou was the Chief Financial Officer of UDP, he was entitled and obliged to use those parts of UDP’s information that were necessary for him to provide it with the services that were part of his duties.
152 If there had been a breach of the confidential information clause, then the quantum of any damages would have to be the subject of further submission because the liquidated damages clause 13.4 does not apply to such breaches.
Conclusion on Issue five
153 Mr Georgiou and GEO Corporation did not disclose, or use, confidential information in breach of clause 9 of the Agreement, or in breach of obligations created by the law or equity. At most, he made use of knowledge of UDP as being a potential source of work for him. In the circumstances of this case, that cannot be regarded as using client details or business plans etc or techniques and methods of budgeting and marketing analysis in contravention of clause 9. Mr Georgiou knew Mr Esposito previously and must have known, at least generally, of his accountancy and business advice needs, when he introduced UDP to McLean Delmo as a client.
154 McLean Delmo has not established that Mr Georgiou and/or GEO Corporation disclosed, or used, any confidential information after the Independent Contractor Agreement was terminated. Clause 9 should be read as being directed at confidential information that the Contractor, or the Nominated Person, learns from their work at McLean Delmo. It should not be read as directed at client details and other information described in the definitional clause, that the person knew before he, or she, commenced work at McLean Demo or, that they learned from their later work with the client.
155 Apart from the protection given to information from the terms of a contract, the law does not prevent an employee making use of his own knowledge or experience.[42] As stated previously, Mr Georgiou, and therefore GEO Corporation, knew Mr Esposito and introduced him to McLean Delmo, where Mr Georgiou performed work for him. This is not a case where an employee has dishonestly recorded customer lists to use them in a new business in competition with his former employer.
[42]See the authorities discussed in Dean, The Law of Trade Secrets and Personal Secrets 2nd edition pps 204-212, including Robb v Green [1985] 2 QB 1 and Faccenda Chickens Ltd v Fowler [1986] 3 WLR 288
156 Gillard J in Hartleys Ltd v Martin[43] summarised the law on this issue as follows:
“In the absence of any restrictive provision, when employees leave an employment, they are free to set up a directly competing business and, indeed, in the immediate locality. Further, employees are entitled to approach the former employer’s customers and seek orders from them. Further, they are entitled to use for their own purposes any information which they carried in their heads regarding the identity of the employer’s customers and contacts, or indeed the nature of the employer’s product requirements. In addition, they are entitled to use the information concerning pricing policies provided the information was acquired honestly in the ordinary course of their employment and they did not, for example, deliberately seek to memorise lists of names for the purpose of their own business.
What employees are not entitled to do is to steal any documents belonging to the employer, or to use, for their own purposes, information which is in fact confidential and which was ascertained in the course of the employment. Further they are not entitled to copy any information onto scraps of paper and take them away for their own business.”
[43][2002] VSC 301 at [78] –[79]
157 McLean Delmo has not established any breach of the obligations imposed on Mr Georgiou or GEO Corporation in relation to confidential information under the law or at equity. The details of, and information concerning, UDP used by Mr Georgiou and GEO Corporation were not confidential information. In addition there is no evidence that they used that information in breach of obligations imposed by the law.
Issue 6 Did GEO Corporation and Mr Georgiou breach fiduciary duties that they owed McLean Delmo?
158 McLean Delmo contended that Mr Georgiou and GEO Corporation owed it fiduciary duties:
(a) to serve it with loyalty and fidelity;
(b) to keep confidential information and trade secrets of it and its clients confidential and not to divulge or misuse such information or secrets;
(c) not to use any information acquired in the course of the engagement other than for its benefit.
159 The facts relied on by McLean Delmo to establish breaches of these fiduciary duties were the same facts that it relied on to establish breaches of the restrictive covenant. They are set out above.
160 McLean Delmo’s claims for breach of fiduciary are separate claims that do not depend on the validity of the restrictive covenant. McLean Delmo argued that the defendants’ fiduciary duty was to not act contrary to its interests by taking the opportunity to provide services to UDP directly, or through Webb Group Australia. The conversation of 20 March 2008 between Mr Georgiou and Mr Esposito, that initiated his engagement as Chief Financial Officer, occurred while he owed fiduciary duties to McLean Delmo.
161 The defendants submitted that neither Mr Georgiou or GEO Corporation owed fiduciary duties to McLean Delmo. There was no need to impose fiduciary obligations on them as the Independent Contractor Agreement contained detailed regulation of the relationship. The effect of clause 4 of that Agreement, which described the nature of the relationship, was to exclude such duties. Any obligations of a fiduciary relationship must be accommodated to the terms of the contract.
162 Mr Georgiou could not owe an ongoing fiduciary duty of loyalty to McLean Delmo while working with UDP. He had a duty to act in the best interests of UDP and did not have an ongoing duty to ensure that McLean Delmo continued to retain UDP as a client. Any information about UDP’s business that Mr Georgiou used was information owned by, and used on behalf of, UDP.
163 The defendants further submitted that fiduciary obligations are proscriptive rather than prescriptive.[44] If they did owe fiduciary duties to McLean Delmo, they were limited to obligations not to profit as a result of knowledge gained from the fiduciary relationship and not to put themselves in a position where their personal interests conflicted with their obligations to it. They had not breached those obligations.
[44]Pilmer v Duke Group Ltd (in liquidation) (2001) 207 CLR 165 at 198
164 The defendants argued that, even a fiduciary relationship existed, it did not survive the termination of the Independent Contractor Agreement.[45]
[45]They relied on Distronics Ltd v Edmonds [2002] VSC 454, see on appeal Edmonds v Donovan (2005) 12 VR 513, Hartleys Ltd vMartin (supra) and Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309, but an appeal from that judgment was allowed: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 and see Young, Croft and Smith, On Equity, para 7.110
Conclusion on Issue six
165 The first question is whether the defendants owed McLean Delmo fiduciary duties as alleged.
166 Some relationships are clearly recognized as fiduciary relationships eg that of partners[46]. The relationship between an employer and an employee is a fiduciary relationship, although employees also have implied contractual duties of good faith.[47] In Hospital Products Ltd v United States Surgical Corporation[48], Mason J stated that a mere sub-contractor was not a fiduciary, because he was not exercising a power or discretion which placed the head contractor in a position of vulnerability.
[46]Chan v Zacharia (1983) 154 CLR 178
[47]Young, Croft and Smith, On Equity, p 517 and Victoria University of Technology v Wilson [2004] VSC 33 at [141]
[48](1984) 156 CLR 41 at 97
167 However Mr Georgiou’s position, and therefore the position of GEO Corporation, were not that of a mere sub-contractor, but were more like that of a senior employee or even a partner. The independent contractor/ nominated person structure that was adopted by the parties for taxation reasons did not reflect the reality, and essence, of the relationship that existed.
168 I consider that the relationship between McLean Delmo and Mr Georgiou and GEO Corporation was a fiduciary relationship. In that relationship both defendants owed an obligation of loyalty to McLean Delmo.[49] That obligation encompasses in this case the three obligations relied on by McLean Delmo.
[49]See Chan v Zacharia (1983) 154 CLR 178 at 198 and Young, Croft and Smith, On Equity, pp 533-534
169 Both Mr Georgiou and his company GEO Corporation owed that obligation to McLean Delmo. Mr Georgiou chose to provide his work to McLean Delmo through GEO Corporation. If fiduciary obligations were imposed on Mr Georgiou, but not on his company through which he provides his work, McLean Delmo may well be provided with limited protection.
170 The question whether that fiduciary relationship survived the termination of the Independent Contractor Agreement requires separate consideration. Generally a fiduciary relationship, with its associated obligations, does not continue after the termination of the relationship which gives rise to it[50]. However fiduciary duties can survive the cessation of that relationship, for instance in the case of partnerships or joint ventures, where commercial opportunities are identified before the relationship ends, or arise as a result of information obtained during the relationship. As Warren J stated in Distronics Ltd v Edmonds:
“The survival of the duty owed by a fiduciary has been held to occur particularly where the cessation of the relationship can be construed as having been prompted or influenced by an intention or desire to pursue an opportunity identified before cessation ( authorities omitted).”[51]
[50]See the cases cited in Young, Croft and Smith, On Equity, p 518
[51][2002] VSC 454 at [169]
171 Fiduciary duties always are to be applied to particular property or activities. They do not exist in the abstract.
172 The parties dealt in the Independent Contractor Agreement with the restrictions to be imposed on Mr Georgiou and GEO Corporation after the Agreement ended. Those restrictions were of the kind often imposed on former employees. There is no reason to impose any additional fiduciary duties after the termination of the Independent Contractor Agreement.
173 In any event, if the defendants did continue to owe the fiduciary duties relied on by McLean Delmo after the termination of the Independent Contractor Agreement, the extent of those duties had to be accommodated to the obligations that Mr Georgiou and GEO Corporation owed to UDP. In the particular circumstances of this case, these included the duty to advise it about the accountants who were appropriate for its business requirements. Once that duty is taken into account, it cannot be concluded that McLean Delmo has established that Mr Georgiou or GEO Corporation breached the fiduciary duty alleged by taking up the position of Chief Executive Officer with UDP or, merely by then advising that it change accountants.
174 Mr Georgiou did not take up the position of Chief Executive Officer until after the Independent Contractor Agreement was terminated. He received pay in lieu of notice to terminate the Agreement with effect from 20 or 21 March 2008. He was entitled to find work and clients of McLean Delmo were likely sources of work for him. His actions in carrying out the duties of that new role cannot by themselves breach any fiduciary duties that he owed to McLean Delmo.
175 The remaining question is whether Mr Georgiou breached the fiduciary duties that he owed to McLean Delmo by entering into the agreements with Webb Group Australia and recommending that UDP’s accountancy work be transferred to it. I have found that the defendants were entitled to advise UDP to change accountants.
176 Webb Group Australia performed accountancy work for UDP for some time apparently satisfactorily. The fact that Mr Georgiou, and his trust company Linxcorp, took advantage of that transfer of work by negotiating a commission arrangement with Webb Group Australia in respect of UDP and other clients does not constitute a breach of fiduciary duty owed to McLean Delmo.
177 This is not a case where the defendants have profited from information that they learned whilst under fiduciary duties owed to McLean Delmo.
178 It is important that a distinction is clearly made between the duties that the defendants owed to McLean Delmo and those that they owed to UDP. My findings and conclusions do not in any way deal with the question of what duties Mr Georgiou owed to UDP at the time that he negotiated the arrangement and agreements with Webb Group Australia. Nor do they express conclusions on the ethics or commercial morality displayed by those who were involved in those agreements or arrangements. I have not commented on these matters because they were not part of the case pleaded or argued. In addition Webb Group Australia was, of course, not represented at the trial.
Issue 7 Did McLean Delmo know of, or acquiesce in, the conduct of the defendants which it alleges breached fiduciary duties owed to it so as to disentitle it from relief?
179 The defendants argued that McLean Delmo consented to, or acquiesced in, Mr Georgiou and GEO Corporation providing services to UDP and in Mr Georgiou becoming its Chief Financial Officer. McLean Demo therefore consented to, or acquiesced in, any breach by the defendants of their fiduciary duties. They also argued that McLean Delmo’s delay in commencing proceedings was a reason for refusing any relief for breach of any fiduciary or equitable duty. They relied on the doctrine of laches.
180 McLean Delmo only commenced this proceeding after Mr Esposito told Mr Delmo of Mr Georgiou’s relationship with Webb Group Australia. Both of them were upset at Mr Georgiou’s conduct. McLean Delmo’s breach of fiduciary duty case was introduced by amendment made only on 21 May 2010. Mr Delmo and other senior staff of McLean Delmo knew that Mr Georgiou was working as Chief Financial Officer at UDP soon after he commenced in April 2008.
181 McLean Delmo’s case was that it was not fully apprised of the facts until informed by Mr Esposito in September 2009. It certainly did not know of the arrangement and agreements that Mr Georgiou had made with Webb Group Australia, nor did it know of Mr Georgiou’s comments about its capability to continue to provide accountancy services to UDP.
Conclusion on issue seven
182 The evidence suggests that McLean Delmo knew from about April 2008 that Mr Georgiou was working for UDP. It also knew at that time that UDP had decided to cease being a client of McLean Delmo. While I have not accepted that Mr Delmo received Mr Georgiou’s group email of April 2008, there is ample evidence that Mr Delmo and other senior staff knew of, did not object to, and indeed assisted Mr Georgiou in his work for UDP. They knew that Webb Group Australia had become UDP’s accountant and facilitated the transfer of work to it. They must have known that Mr Georgiou had played a part in the transfer of the work.
183 I have previously set out the evidence that relates to that knowledge on the part of UDP.
184 McLean Delmo conduct suggested that it agreed to, or accepted, Mr Georgiou’s conduct. Its conduct encouraged him to believe that his acts were accepted or not opposed.[52] Its delay in commencing proceedings had the same result[53]. No distinction is to be drawn in respect of this present issue between the position of Mr Georgiou and that of GEO Corporation.
[52]Young, Croft and Smith, On Equity, p 1169 and Orr v Ford (1989) 167 CLR 316 at 338-340
[53]Orr v Ford Supra, at 341
185 The matters that changed McLean Delmo’s position of acceptance of Mr Georgiou’s conduct, to its decision to pursue litigation, was the information that Mr Esposito gave to Mr Delmo. However that information did not alter the facts that McLean Delmo previously knew, or must be taken to have known. These were that Mr Georgiou was working for UDP as Chief Financial Officer and had played a part in the transfer of its accountancy work to Webb Group Australia. It would be inequitable and unreasonable to allow McLean Delmo to obtain a remedy in respect of that conduct of Mr Georgiou and GEO.
186 Although McLean Delmo did not know the details of Mr Georgiou’s criticisms of its ability to provide the accountancy services that UDP required, it should have known that Mr Georgiou, in all likelihood, had advised UDP not to continue to engage McLean Delmo as its accountant.
187 McLean Delmo did not know of Mr Georgiou’s agreements with Webb Group Australia until September 2009 when Mr Esposito informed Mr Delmo. If I had concluded that Mr Georgiou’s conduct in recommending or arranging for Webb Group Australia to become UDP’s accountant had breached fiduciary duties owed to McLean Delmo, I would have found that the defences of acquiescence and laches relied on by the defendants had not been established in respect of that conduct. However I have not reached that conclusion.
Conclusion
188 The plaintiff has not established an entitlement to relief against the defendants. The proceeding is dismissed. I will hear the parties about costs and any other orders that are required.
0
24
0