McMurchy v Employsure Pty Ltd; Kumaran v Employsure Pty Ltd

[2022] NSWCA 201

Court of Appeal

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

McMurchy v Employsure Pty Ltd; Kumaran v Employsure Pty Ltd [2022] NSWCA 201

Hearing dates:

29 April 2022

Date of orders:

11 October 2022

Decision date:

11 October 2022

Before:

Gleeson JA at [1]
Leeming JA at [158]
Kirk JA at [159]

Decision:

2021/328205 (McMurchy/ELMO appeal)

(1)   Grant leave to appeal.

(2)   The appellants to file a notice of appeal in terms of the amended draft notice of appeal in the supplementary white folder, tab 1, within seven days.

(3)   Appeal dismissed.

(4)   The appellants to pay the respondent’s costs in this Court.

2021/328225 (Kumaran/ELMO appeal)

(1)   Grant leave to appeal.

(2)   The appellants to file a notice of appeal in terms of the draft notice of appeal in the white book within seven days.

(3)   Appeal allowed.

(4)   Set aside orders 1, 3, 5 and 6 made by the primary judge on 26 October 2021 and in lieu order that the Summons filed 24 February 2021 be dismissed.

(5)   Reserve the question of costs in this Court.

(6)   If the parties do not submit consent orders as to costs in this Court and below within 14 days of the date of these orders, direct the respondent to file and serve its written submissions as to the appropriate cost orders within 21 days of the date of these orders, the appellants to file and serve their written submissions in response within a further seven days (in each case not exceeding four pages), with any reply by the respondent to be filed and served within a further seven days (not exceeding two pages), and note that the question of costs will be determined on the papers.

Catchwords:

CONTRACT – restraint of trade – whether exclusive employment covenants reasonable – whether potentiality for confidential information to be used to employer’s detriment – where proposed new employer supplied a competing product – where employee had received information about marketing, shortcomings and potential development of employer’s product

CONTRACT – restraint of trade – whether competitor restraint reasonable – where restraint only operated if competition existed at termination – language of restraint justifies inference that parties contemplated competition at termination – not necessary to prove specific competitors existed at time of entry into restraint

CONTRACT – restraint of trade – challenge to discretion to make declaration and grant injunction – whether protectable interest in employer’s confidential information at date of hearing

CONTRACT – restraint of trade – inducing or encouraging another employee to leave employment – whether other employee had independently decided to leave – where finding as to materiality of encouragement and inducement was well open

Legislation Cited:

Restraint of Trade Act 1976 (NSW), s 4(1)

Supreme Court Act 1970 (NSW), ss 75, 101(2)(r), 103

Uniform Civil Procedure Rules 2005 (NSW), rr 28.2, 42.1

Cases Cited:

Ainsworth v Criminal Justice Commission (1992) 175 CLR 564; [1992] HCA 10

AMP Services Ltd v Manning [2006] FCA 256

Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9; [2006] NSWSC 717

Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337

Emeco International Pty Ltd v O’Shea (No 2) [2012] WASC 348; (2012) 225 IR 423

Employsure Pty Ltd v McMurchy [2021] NSWSC 139

Haynes v Doman [1899] 2 Ch 13

Herbert Morris Ltd v Saxelby [1916] 1 AC 688

Hodgson v Amcor Ltd [2012] VSC 94; (2012) 264 FLR 1

Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343; [2018] NSWCA 163

JMB (NSW) Pty Ltd v West [2020] NSWSC 1380

Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564

Lindner v Murdock’s Garage (1950) 83 CLR 628; [1950] HCA 48

Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472

Maitland Main Collieries Pty Ltd v Hunter Valley Coal Corporation Pty Ltd [2006] NSWCA 258

Metcash Limited v Jardim (No 3) [2010] NSWSC 1096; (2010) 273 ALR 407

Miles v Genesys Wealth Advisers Ltd [2009] NSWCA 25; (2009) 201 IR 1

Minister for Immigration and Border Protection v SZVFW (2018) 264 CLR 541; [2018] HCA 30

Pearson v HRX Holdings Pty Ltd (2012) 205 FCR 187; [2012] FCAFC 111

Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; [2001] HCA 45

Putsman v Taylor [1927] 1 KB 637

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

Stenhouse Australia Ltd v Phillips [1973] 2 NSWLR 691

Sun v Chapman [2022] NSWCA 132

Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852; (2008) 175 IR 414

Warren v Coombes (1979) 142 CLR 531; [1979] HCA 9

Woolworths Limited v Olson [2004] NSWCA 372

Texts Cited:

J D Heydon, The Restraint of Trade Doctrine (2018, 4th ed, LexisNexis Butterworths)

Young, Croft and Smith, On Equity (2009, Lawbook Co)

Category:

Principal judgment

Parties:

2021/328205
David McMurchy (First appellant)
ELMO Software Limited (ABN 13 102 455 087) (Second appellant)
Employsure Pty Ltd (ABN 40 145 676 026) (Respondent)

2021/328225
Arumugam Kumaran (First appellant)
ELMO Software Limited Pty Ltd (ABN 13 102 455 087) (Second appellant)
Employsure Pty Ltd (ABN 40 145 676 026) (Respondent)

Representation:

Counsel:
I M Neil SC / P Lowson (Appellants)
P J Brereton SC / P Moorhouse (Respondent)

Solicitors:
K & L Gates (Appellants)
Kardos Scanlan (Respondent)

File Number(s):

2021/328205; 2021/328225

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity Division

Citation:

[2021] NSWSC 1179

Date of Decision:

26 October 2021

Before:

Sackar J

File Number(s):

2021/16210; 2021/53385

HEADNOTE

[This headnote is not to be read as part of the judgment]

Employsure Pty Ltd (Employsure) is in the business of providing human resources and workplace health and safety consultancy services. In 2019, Employsure launched BrightHR and BrightSafe, software programs to manage and automate human resources functions for small to medium enterprises.

Mr David McMurchy was appointed as Employsure’s Outbound Sales Manager in February 2018 and then as Manager, BrightHR in June 2019, which the primary judge found to be senior roles involving the development and execution of Employsure’s business strategy. His 2018 employment contract included confidentiality and exclusive employment covenants, including that he would not, without prior written consent, engage in outside employment that, in the reasonable opinion of Employsure, may hinder or otherwise interfere with the performance of his duties. The contract also included a post-employment restraint that he would not be engaged in a business in competition with Employsure for a period of 12, 9, 6 or 3 months.

Mr Arumugam Kumaran commenced employment with Employsure in February 2018 as an Outbound Business Sales Consultant. In November 2019, he became a Business Sales Partner in the Inbound Sales team, which the primary judge found to be the most senior level of sales employee. His 2018 employment contract contained a confidentiality covenant and a post-employment restraint similar to Mr McMurchy’s contract.

In October 2020, ELMO Software Ltd (ELMO), a software provider of cloud human resources, payroll and rostering time software, announced that it had acquired Breathe, a “self-service HR platform” for small businesses. ELMO launched this new software product in February 2021. Employsure and ELMO were competitors in relation to the BrightHR and Breathe software products.

In December 2020, Mr McMurchy accepted a position with ELMO managing a sales team selling Breathe software and gave Employsure four weeks’ notice of his resignation which was ineffective, being less than the three months’ notice required under his contract. Mr McMurchy also offered to supply ELMO with the names of potential Employsure sales employees and provided Mr Kumaran’s name to ELMO’s recruiter, having earlier approached Mr Kumaran about a role with ELMO. On 12 January 2021, Employsure gave Mr McMurchy three months’ notice of termination and directed him not to attend the office, but to remain available during business hours to respond to queries and perform duties as requested, under “gardening leave” provisions of his contract.

In late January 2021, Mr Kumaran accepted employment with ELMO as account executive, supporting existing customers of, and seeking to sell to potential customers, ELMO’s Breathe software. His employment with Employsure ended on 10 February 2021.

Employsure commenced separate proceedings against Mr McMurchy and ELMO, and Mr Kumaran and ELMO, to enforce the confidentiality obligations and the competitor restraint.

The primary judge held that:

1. the exclusive employment covenants were reasonable and Mr McMurchy breached those covenants by taking up employment with ELMO whilst still employed by Employsure;

2. a post-employment restraint for nine months from 12 January 2021 was reasonable and injunctive relief was appropriate to enforce this restraint for a period of six months following the end of Mr McMurchy’s employment on 12 April 2021 (Ultimately, a declaration to this effect was made in lieu of an injunction.);

3. Mr McMurchy breached his contract of employment by encouraging and inducing Mr Kumaran to leave his employment with Employsure, and ELMO knowingly induced and assisted Mr McMurchy in this breach; and

4. a post-employment restraint of nine months was reasonable following the end of Mr Kumaran’s employment with Employsure on 10 February 2021; and injunctive relief was appropriate to enforce this restraint until 10 November 2021.

Both Mr McMurchy and Mr Kumaran, together with ELMO, appealed challenging those findings and the declarations and injunctive relief giving effect to those findings.

Held (Gleeson JA, Leeming and Kirk JJA agreeing) dismissing Mr McMurchy/ELMO’s appeal and allowing Mr Kumaran/ELMO’s appeal.

As to Mr McMurchy/ELMO’s appeal:

1. Employsure had a legitimate interest to protect through the exclusive employment covenants its interest in the performance of the employee’s duties during the pendency of the contract, including that Mr McMurchy devote the whole of his skill, time and attention during business hours to his duties to Employsure and observe his obligations of confidentiality: [43].

2. By taking up employment with ELMO to manage a sales team selling a competing software product whilst still employed by Employsure, Mr McMurchy proposed to engage in another business that may hinder or interfere with the performance of his duties to Employsure: [44]. The restraint was aimed at the absorption, not sterilisation, of Mr McMurchy’s capacity by securing the proper performance of his duties: [45]. The exclusive employment covenants were reasonable, including during the three-month period of “gardening leave”: [46].

   Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852; (2008) 175 IR 414; Woolworths Limited v Olson [2004] NSWCA 372 applied; Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564 referred to.

3. Employsure had a legitimate interest in protecting its confidential information through a restraint against competition after the departure of the employee: [52]-[53]. It is not necessary to identify the confidential information with precision at the time the contract was entered into: [54]. That confidential information could be used by ELMO to Employsure’s detriment, given the unchallenged findings that Employsure and ELMO were in competition in the supply of the two software products and the nature of rhe confidential information to which Mr McMurchy had access, included the marketing, shortcomings and potential development of the BrightHR product: [57]-[58].

   Miles v Genesys Wealth Advisors Ltd [2009] NSWCA 25; (2009) 201 IR 1 applied.

   Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343; [2018] NSWCA 163; Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472; Emeco International Pty Ltd v O’Shea (No 2) [2012] WASC 348; (2012) 225 IR 423 referred to.

4. A post-employment restraint of nine months from 12 January 2021 was reasonable (that is, six months from termination of employment on 12 April 2021). There was no error in this evaluative assessment of his Honour which took into account the contractual consensus of a longer restraint of 12 months, the length of time Employsure’s confidential information remained current and of commercial advantage, and Mr McMurchy’s status as Manager of BrightHR: [70].

   Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9; [2006] NSWSC 717 referred to.

5. There was no error in the discretionary decision that injunctive relief should be granted enforcing the restraint for a period of six months from 12 April 2021, nor in granting a declaration to that effect in lieu of an injunction: [85].

   Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852; Ainsworth v Criminal Justice Commission (1992) 175 CLR 564; [1992] HCA 10; Maitland Main Collieries Pty Ltd v Hunter Valley Coal Corporation Pty Ltd [2006] NSWCA 258 referred to.

6. The finding that Mr McMurchy’s conversation materially influenced Mr Kumaran’s decision to leave Employsure and join ELMO was open, given the finding that Mr McMurchy took an active role in ensuring Mr Kumaran left his employment: [93]-[96]. This case is distinguishable from situations where one employee had discussed employment opportunities with other potential employers with another employee who had already independently decided to leave their employment: [103]-[104].

   Hodgson v Amcor Ltd [2012] VSC 94; (2012) 264 FLR 1; AMP Services Ltd v Manning [2006] FCA 256 distinguished.

As to Mr Kumaran/ELMO’s appeal

1. The “correctness” standard of appellate review applies to a challenge to the finding that the restraint was reasonable: [129]-[130].

   Warren v Coombes (1979) 142 CLR 531; [1979] HCA 9; Minister for Immigration and Border Protection v SZVFW (2018) 264 CLR 541; [2018] HCA 30; Sun v Chapman [2022] NSWCA 132 referred to.

2. Employsure had a legitimate interest in protecting its confidential information through a restraint against competition after the departure of its employee. It was reasonably contemplated that Mr Kumaran would have access to confidential information, including by virtue of promotion which was also in the parties’ contemplation at the time of the contract: [133], [135]. That Mr Kumaran in fact had access to confidential information, including about the productivity of the sales team and about customer data, identities and dealings, given his client-facing role ([125], [127]), was relevant to what was foreseeable at the time of entry into the restraint: [139]. A restraint to protect against misuse of confidential information was reasonable: [142].

3. However, a restraint for a duration of nine months was unreasonable and his Honour’s finding to the contrary should be set aside. The finding was irreconcilable with the related finding that much of the information to which Mr Kumaran was exposed would no longer be in his memory: [147]. Given the nature of his low-level position and duties, the parties should be taken to have reasonably expected that the currency of any confidential information obtained by Mr Kumaran would be short-lived: [148].

   Stenhouse Australia Ltd v Phillips [1973] 2 NSWLR 691 referred to.

4. As Employsure did not submit for a reading down of the duration of the restraint for a lesser period than nine months, it is unnecessary to consider such alternatives or re-exercise the discretion to grant injunctive relief for a lesser period: [152].

Judgment

1. GLEESON JA: David McMurchy and Arumugan Kumaran, two former employees of the respondent, Employsure Pty Ltd (Employsure), together with their current employer, ELMO Software Ltd (ELMO), seek leave to appeal from declarations and orders made by Sackar J on 26 October 2021 in separate proceedings brought by Employsure against them.

2. In his judgment delivered on 17 September 2021 (Employsure Pty Ltd v McMurchy; Employsure Pty Ltd v Kumaran [2021] NSWSC 1179), his Honour concluded that:

• exclusive employment covenants and a post-employment restraint in a contract between Employsure and Mr McMurchy, and a post-employment restraint in a contract between Employsure and Mr Kumaran were reasonable and therefore valid,

• injunctive relief was appropriate against both Mr McMurchy and Mr Kumaran to enforce the competitor restraint,

• Mr McMurchy had breached his contractual and fiduciary duties owed to Employsure by encouraging and inducing Mr Kumaran to leave his employment with Employsure and join ELMO, and

• ELMO had knowingly induced Mr McMurchy to breach his contract and knowingly assisted him to breach his fiduciary duties in that manner.

3. The orders made by his Honour on 26 October 2021 included that Employsure’s application for damages and/or equitable compensation or an account of profits should be listed for directions before a Registrar.

4. Leave to appeal is required because the decision involves the determination of a separate question, since an order was made on 18 March 2021 under Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 28.2 that the question of quantum of damages be determined separately and subsequently to the final hearing: Supreme Court Act 1970 (NSW), s 103. There should be a grant of leave to appeal in each matter as the applicants would have an appeal as of right, following final orders upon the assessment of damages or compensation, subject to the monetary threshold of $100,000 (s 101(2)(r)). In addition, the proposed appeals raise substantial issues for determination beyond a merely arguable injustice.

5. For the reasons that follow, the appeal in the McMurchy proceedings should be dismissed, whilst the appeal in the Kumaran proceedings should be allowed.

Background

6. Employsure is in the business of providing human resources and workplace health and safety consultancy services throughout Australia and New Zealand. ELMO is a software provider of cloud human resources, payroll and rostering time software in Australia and New Zealand.

7. From October 2019, Employsure offered for sale and support a software product known as “BrightHR” and “BrightSafe” which had been developed for small to medium enterprises with up to 50 employees to manage and automate their human resources function. This product was offered by Employsure in conjunction with subscriptions for its consultancy services.

8. In October 2020, ELMO announced in a media release that it had acquired a software product known as the “UK HR platform Breathe” which ELMO described as a “self-service HR platform” that would provide it with entry into the small business market for organisations with less than 50 employees. ELMO launched the “Breathe” software product in Australia in early February 2021.

9. His Honour found that Employsure and ELMO were competitors in relation to BrightHR and Breathe software products, which were similar products aimed at the same or similar markets, at the relevant time when Mr McMurchy’s employment contract ended on 12 April 2021: at [375]. There is no challenge to this finding.

10. Employsure had an Inbound and Outbound Sales team. The Inbound Sales team serviced Employsure’s helpline which was advertised on internet search engines used by Employsure to promote its services. After a prospective employer or business contacted the Inbound Sales team, the sales consultants would offer them a meeting with the Business Development Managers to discuss a subscription with Employsure. The Outbound Sales team would seek to generate leads for new business through sales consultants via cold calling, seminar events and other marketing led initiatives. As explained below, Mr McMurchy and Mr Kumaran were each employed at various times as part of Employsure’s sales team.

Mr McMurchy

11. Mr McMurchy commenced employment with Employsure in January 2015 as a Business Sales Consultant. He was promoted to the role of Outbound Sales Manager with effect from 1 April 2018 on the terms of the written contract made on 20 February 2018 (the 2018 contract). In June 2019, he was appointed as “Manager, BrightHR”. The terms of his 2018 contract were varied by a letter dated 3 June 2019 to reflect the new position, including changes to his salary and bonus arrangements. The letter recorded that the purpose of Mr McMurchy’s position was:

To support the vision, strategy and plan for Employsure’s BrightHR function. Further, to contribute to the development of the overall business strategy and plan, contributing to the overall success of Employsure.

12. The primary judge found that the role of Outbound Sales Manager was a senior one within Employsure as Mr McMurchy had a group of team leaders reporting to him who in turn had about 100 sales staff reporting to them: at [379]. Mr McMurchy accepted in cross-examination that when appointed to this position he understood that he would become privy to some but not all of Employsure’s highly confidential information.

13. The 2018 contract expressly contemplated that Mr McMurchy will receive “Confidential Information” (cl 16.2(a)), which term was widely defined in cl 1 of the contract:

Confidential Information means any confidential or proprietary information in respect of the Company, its Related Bodies Corporate and its Clients which is not in the public domain (other than by the Employee’s act or default) and includes, any document, book, account, process, methodology, program, database, research, development specification, drawing, design or know-how, board reports, financial data, quotations, short-term and long-term plans, customer lists, business objectives, trade secrets, strategic plans, corporate deliverables, government submissions and all past, present and future business activities of a Group Company or any of its Clients.

14. Clause 16.1 imposed obligations about what must and must not be done in respect of Confidential Information, including to keep any such information secret and confidential and refrain from using it in any manner which will or may cause or be calculated to cause injury or loss to Employsure. Mr McMurchy acknowledged that “any further disclosure of such Confidential Information may diminish the value of the Confidential Information and could materially harm [Employsure]” (cl 16.2(b)) and that the confidentiality obligations survive termination of the contract (cl 16.2(e)).

15. The 2018 contract contained exclusive employment covenants and a post-employment restraint. The exclusive employment covenants in cl 5.1 and cl 18.2 provided:

5.      PRINCIPAL DUTIES

5.1     The Employee must

(a)    devote the whole of their time, attention and skill during normal business hours, and at other times as reasonably necessary, to their duties for the Company.

(b)   faithfully and diligently perform the duties and exercise the powers entrusted to them from time to time

(c)   promote the interests and prosperity and enhance the reputation of the Company

…

18.    OUTSIDE EMPLOYMENT

18.2    Without the prior written consent of the Company, the Employee must not, while employed by the Company, be engaged or interested in any other business or occupation (whether paid or unpaid) (Additional Business) that, in the reasonable opinion of the Company, may hinder or otherwise interfere with the performance of the Employee’s duties.

16. The post-employment restraint in cl 20.1 provided:

20.   POST-EMPLOYMENT RESTRAINTS

20.1   The Employee agrees not to carry on or be engaged, concerned or interested, directly or indirectly, in any capacity specified in paragraph (a) below, in any business or activity specified in paragraphs (b) to (d) below, within any area specified in paragraph (c) below for any period specified in paragraph (f) below:

(a)   As … Employee … or consultant

(b)   In any business or prospective business in competition with the Company or Related Body Corporate at the time of termination of employment

…

(e)   In any areas specified in Item 7 of the Schedule

(f)   During the period specified in Item 8 of the Schedule.

20.2   The Employee separately enters into each of the covenants resulting from combining separately each of the capacities in paragraph (a) above with each business or activity in paragraphs (b) to (d) above and combining each such combination with each geographical area in paragraph (e) above and combining each such combination with each period in paragraph (f) above with the Company and Related Bodies Corporate.

20.3   Each of these covenants constitutes an independent and separate restraint imposed on the Employee.

20.4   If any of those covenants is or will become unenforceable, that does not affect the validity and enforceability of the other covenants imposed under this clause, which remain binding on the Employee.

17. The areas and period specified in Items 7 and 8 of the Schedule to the 2018 contract were:

Item 7   Area   (i)   Australia

(ii)   New South Wales; or

(iii)   Sydney

Item 8   Period   (i)   12 months;

(ii)   9 months;

(iii)   6 months; or

(iv)   3 months.

18. Between June and October 2019, in his new role as Manager, BrightHR, Mr McMurchy was engaged in learning about the BrightHR software and business which was already operating in the United Kingdom; he travelled to the United Kingdom for that purpose. He was also involved in setting up the systems and processes that were required for the launch of that product by Employsure in Australia and New Zealand. His title changed to “Manager, Bright” upon the launch of the BrightSafe software product in October 2019.

19. On 11 December 2020, Mr McMurchy accepted a position with ELMO as “Sales & Customer Success Director, Breathe”. This involved managing a sales team selling the Breathe software, and managing the support of Breathe software users. In his resume provided to ELMO, Mr McMurchy described his accomplishments and key position details with Employsure as including:

BrightHR Manager – Employsure

∙   Launched the organisations (sic) first software and built Success Management and Business Sales teams.

∙   Developed the marketing strategy and content to add value at every interaction with prospective clients.

∙   First year on the market saw rapid growth of over 7500 active companies on the applications.

∙   Exceeding upsell quarterly targets by 153% in new client numbers and 130% in revenue granting Bright’s first ever bonus payments.

∙   Run day to day operations by isolating team shortfalls, conducting skill gap analysis and making timely interventions to improve performance.

∙   Improving Bright’s synergy with the core service by disrupting the traditional methods of delivery and engagement.

∙   Built and delivered the training material used to on board new Bright Specialists and Account Executives.

∙   Facilitated the group to create our own standards to adhere to proving a boost to the culture.

20. On 14 December 2020, Mr McMurchy gave four weeks’ notice of his resignation from Employsure. That was less than the three months’ notice required by cl 19.1 of his contract and was not effective. On 12 January 2021, Employsure’s solicitors gave Mr McMurchy three months’ written notice of termination of his employment. Consequently, his contract of employment ended on 12 April 2021. (There is no challenge to this finding by the primary judge: at [326].) At the same time, Mr McMurchy was directed not to attend the office and not to undertake any work other than as directed by Employsure, but to remain available during business hours to respond to queries or problems and perform duties as requested. This direction was given under cl 19.3 of the 2018 contract which provided for what is commonly known as “gardening leave” in the following terms:

19.   TERMINATION OF EMPLOYMENT

…

19.3    The Company may require that the Employee:

(a)    not attend the office

(b)    not undertake any work

(c)    undertake only limited work

during part or of the notice period referred to in this clause.

21. On 14 December 2020, Mr McMurchy offered to supply ELMO with the names of potential Employsure sales employees. On 16 December, he sent a message to Mr Shevers, ELMO’s recruiter, in which he mentioned three such employees, including Mr Kumaran. Having approached Mr Kumaran about the role with ELMO, Mr McMurchy told Mr Shevers on the following day that the three employees, including Mr Kumaran, were “very keen on the role and opportunity”.

22. Employsure commenced proceedings against Mr McMurchy on 19 January 2021, and two days later, Mr McMurchy gave undertakings which included that he would not perform any work or duties for ELMO until further order or until after 5 February 2021. On 8 February 2021, an order was made restraining Mr McMurchy from working for ELMO until 14 March 2021: Employsure Pty Ltd v McMurchy [2021] NSWSC 139. On 15 March 2021, further interlocutory orders were made by Parker J restraining Mr McMurchy, until the determination of the proceedings, from performing any work or duties for or at the direction of ELMO. Up until 11 October 2021, when the competitor restraint expired on the primary judge’s findings, Mr McMurchy was paid by Employsure pursuant to undertakings it gave when obtaining interlocutory relief on 15 March 2021.

Mr Kumaran

23. Mr Kumaran commenced employment with Employsure on or about 27 February 2018, pursuant to a written contract dated 19 February 2018. He was then aged 22 years. His initial position was as “Business Sales Consultant”, and he worked as an “Outbound” sales consultant. Mr Kumaran described his position as an entry level sales position. He received two promotions and was ultimately appointed to the position of “Business Sales Partner, Inbound” with effect from 4 November 2019. His role was to convert leads that came through via the Employsure website and other enquiries to prospective clients who would be booked to attend a meeting with a Business Development Manager if the person made a commitment to a phone or video conference with a sales consultant. He did not conduct sales meetings with prospective customers or negotiate their contractual terms or subscriptions. His “Key accountabilities” were listed in his contract as including:

30 booked appointments per week

25 sat appointments per week with a cancellation rate of 15% or below

Minimum 20 dials per day

Minimum of three hours talk time per day

Cancellation rate of 15% or less

24. Mr Kumaran’s 2018 contract contained a post-employment restraint in the following terms:

Restraint   During your employment you may be associated with our Clients, Intermediaries, and Employees and you may also have access to our confidential information. By accepting this offer of employment you acknowledge that it is commercially important to us that you are restricted in the way you are entitled to deal with such persons or entities and in any use of confidential information and, accordingly, you agree that the restrictions set out below are fair and reasonable.

…

Restraint period means:

∙   12 months

∙   9 months

∙   6 months

∙   3 months

In addition to the above, you will not, during your employment with the Company and the Restraint Period after termination of your employment, within the Restraint Area, be directly or indirectly engaged, concerned or interested with any other person or business that is wholly or partly in competition (or is preparing to be wholly or partly in competition) with the business carried out by the Company or any related entity of ours. For the purposes of this section,

Restraint Area means:

∙   Australia

∙   New South Wales

∙   Sydney

You separately enter into each of the covenants resulting from combining separately each business or activity above with each geographical Restraint Area and combining each such combination with each Restraint Period.

Each of the above obligations are separate and independent obligations. In the event that one or more of the obligations are found to be unenforceable, the remaining obligations will continue to apply.

You acknowledge that each of the restrictions above is in the circumstances reasonable and necessary to protect the company’s legitimate interest.

You acknowledge that you will be liable in damages (including punitive or special damages) arising out of the breach of any of the covenants of this agreement.

25. The terms of Mr Kumaran’s contract included a confidentiality obligation in cl 9 of an attached Schedule of Standards Terms in the following terms:

CONFIDENTIAL INFORMATION

9.1   You agree to maintain the confidence of any Confidential Information that you have access to, or become aware of, during the course of your employment and agree to prevent its unauthorised disclosure or use by any other person.

9.2   You agree not to use the Confidential Information for any purpose other than for the benefit of the Company during or after your employment.

26. The term “Confidential Information” was widely defined in cl 1 of the Schedule as follows:

Confidential Information means all the information including trade secrets, Intellectual Property, client and supplier lists, business contacts, finance, data concerning the Company or any of its related entities or any client of the Company’s , finances, operating margins, but does not include information in the public domain otherwise than through a breach of an obligation of confidentiality.

27. Mr Kumaran was one of eight Business Sales Partners in the Inbound Sales team. The primary judge found that the expression “Partner” denoted the most senior level of sales employee: at [43]. In his final year of employment his earnings of about $134,000 comprised of a base salary of $76,650 plus bonuses and commissions.

28. On 22 January 2021, Mr Kumaran received an offer of employment from ELMO as an Account Executive; he received a revised offer on 25 January 2021. Both offers proposed a commencement date of 12 February 2021. Mr Kumaran gave two weeks’ notice of his resignation on 28 January 2021, with his last day of employment with Employsure to be 11 February 2021. Although Mr Kumaran was required to give four weeks’ notice, Employsure accepted the shorter period of notice in circumstances where it was not aware, and Mr Kumaran did not disclose, that he had already accepted employment with ELMO to commence on 12 February 2021.

29. Mr Kumaran’s position with ELMO as “Account Executive” involved reporting to the General Manager. In his evidence, Mr Kumaran described his role as supporting existing customers of ELMO’s Breathe software and seeking to sell that software to potential customers who had taken up that software.

30. On 24 February 2021, Employsure commenced separate proceedings against Mr Kumaran and ELMO seeking to enforce confidentiality obligations and the competitor restraint in Mr Kumaran’s contract. On 1 March 2021, Mr Kumaran gave interlocutory undertakings not to use or disclose Employsure’s confidential information, which undertakings were continued on 4 March 2021. On 15 March 2021, interlocutory relief was granted by Parker J until the determination of the proceedings, restraining Mr Kumaran from performing any work or duties for or at the direction of ELMO. Mr Kumaran continued to be paid by Employsure as a result of an undertaking it gave when obtaining interlocutory relief until final orders were made.

The primary judge’s essential findings

31. In his judgment, his Honour found that:

McMurchy proceedings

• Mr McMurchy breached his exclusive employment covenants in cll 5.1 and 18.2 by taking up employment with ELMO, without Employsure’s written consent, while he was still employed by Employsure: at [328];

• the post-employment restraint was reasonable and therefore valid, for a period of nine months beginning on 12 January 2021 when Employsure gave three months’ notice of termination of Mr McMurchy’s employment: at [384];

• injunctive relief was appropriate to enforce the competitor restraint for a period of six months after Mr McMurchy’s employment ended on 12 April 2021, which period ended on 11 October 2021: at [424];

• Mr McMurchy breached his contract of employment by encouraging and inducing Mr Kumaran to leave his employment with Employsure to take up employment with ELMO: at [395]-[398]; and

• ELMO had knowingly induced Mr McMurchy in respect of that breach and knowingly assisted him to breach his fiduciary duties in that manner: at [405]-[406].

Kumaran proceedings

• the post-employment restraint was reasonable and therefore valid, for a period of nine months after Mr Kumaran ceased working for Employsure on 10 February 2021, which period ended on 10 November 2021: at [422]; and

• injunctive relief was appropriate to enforce the competitor restraint until 10 November 2021: at [424].

32. Insofar as the appellants challenge the declarations and orders made by his Honour on 26 October 2021, these are referred to below when addressing the specific grounds of appeal.

A. The McMurchy / ELMO appeal

Issues on appeal

33. The appeal by Mr McMurchy and ELMO raises the following issues:

1. whether the exclusive employment covenants were an unreasonable restraint of trade and therefore unenforceable (ground 1);

2. whether Mr McMurchy was precluded by his fiduciary obligations from accepting employment with ELMO or working for ELMO before termination of his 2018 contract (ground 2);

3. whether the post-employment restraint was unreasonable and therefore unenforceable (ground 3);

4. whether the primary judge erred in the exercise of his discretion to grant the declaration reflecting enforcement of the post-employment restraint until 11 October 2021 (ground 4);

5. whether Mr McMurchy induced or encouraged Mr Kumaran to leave Employsure (ground 5); if so, whether that conduct was in breach of Mr McMurchy’s contractual and fiduciary duties (ground 6); and, whether Employsure suffered any loss or damage when Mr Kumaran resigned (ground 7); and

6. whether ELMO knowingly assisted or induced Mr McMurchy to breach his contract and fiduciary duties (ground 8).

34. It is common ground that ground 8 does not assert any independent error by his Honour; it depends on the success of grounds 5 and 6.

Ground 1: exclusive employment covenants

35. Ground 1 challenges the finding and declaration 2(a) and (b) that Mr McMurchy was in breach in cll 5.1(a) and 18.2 of his contract by taking up employment with ELMO, without the written consent of Employsure, while still employed by Employsure. Declaration 2 was in the following terms:

2.   A declaration that during his employment with the plaintiff (the Employment) the first defendant breached:

(a)   clause 18.2 of the 2018 Employment Agreement;

(b)   clause 5.1 of the 2018 Employment Agreement; and

(c)   the general law;

by reason of his conduct in commencing employment with the second defendant.

36. The alleged errors particularised under this ground are that his Honour (a) failed to give reasons for holding that Mr McMurchy was bound by cll 5.1 and 18.2, (b) failed to engage with Mr McMurchy’s submissions that cll 5.1 and 18.2, when read together with cl 19.3, constituted an unreasonable, and therefore invalid restraint of trade, and (c) should have accepted Mr McMurchy’s submissions that the covenants were unreasonable.

37. The appellants did not press the submission that his Honour failed to address their argument that these covenants operated as an unreasonable restraint of trade. That concession was properly made. After recording the appellants’ argument (at [220]-[221]), his Honour found that during the three-month period of notice and while the contract was still on foot, the restraint sought to be imposed not to work for ELMO was reasonable, and expressly rejected the appellants’ submission that to so restrict Mr McMurchy was “oppressive”: at [329]. His Honour further found that Mr McMurchy was obliged not to work for ELMO whilst still employed by Employsure because this was inconsistent with his legal obligations, both contractual and fiduciary, that he was obliged to avoid any situation where there would be a conflict with his loyalty to Employsure, and that by accepting employment with ELMO he breached his express obligations to Employsure: at [333]-[334] and [428].

38. Senior counsel for the appellants said that the real substance of ground 1 is that there is no justification for the pre-termination restraint because there was no or insufficient evidence to support a protectable interest.

Were the exclusive employment covenants reasonable?

39. The doctrine of restraint of trade applies to restrictions imposed during the currency of a contract. As Brereton J said in Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852; (2008) 175 IR 414 at [45], after referring to Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; [2001] HCA 45 at [34], where Gleeson CJ, Gummow, Kirby and Hayne JJ said that “[i]n general, … the restraint of trade doctrine does not apply to contracts which absorb the capacity of the covenantee rather than sterilise it”:

[45] … In that light, it must now be accepted that the doctrine of restraint of trade does apply to restrictions imposed on trade with a third party during the currency of a contract – although they will more easily be justifiable during the term of a contract than after its termination, particularly where directed to the absorption rather than the sterilisation of the employee’s capacity. The pendency of the contract of employment is relevant to whether the restraint is reasonable [Petersville, [36]; see also Masterclass Enterprises Pty Ltd v Bedshed Franchisors (WA) Pty Ltd [2008] WASC 67, [77]-[79]].

40. The validity of the restraint is to be tested at the time of entering into the contract and by reference to what the restraint entitled or required the parties to do rather than what they intend to do or have actually done: Woolworths Limited v Olson [2004] NSWCA 372 at [40] (Mason P, McColl and Bryson JJA agreeing), citing Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 at 344.

41. The appellants accept, as Ball J said in Metcash Limited v Jardim (No 3) [2010] NSWSC 1096; (2010) 273 ALR 407 at [43], that it is “very rare for an obligation not to engage in other employment to be regarded as unreasonable during the term of the employment relationship”. However, the appellants say that this is one of those “rare” cases because (a) the restraint is manifestly directed to sterilisation of Mr McMurchy’s capacity, and (b) there is no evidence that Employsure had a protectable interest during that period.

42. A covenant in restraint of trade must be construed with reference to the objects sought to be attained by it: Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564 at 43,833 (Sheller JA), referring to the remarks of Lord Lindley in Haynes v Doman [1899] 2 Ch 13 at 25-26. Here that object is to protect Employsure’s interest in the performance of the employee’s duties, specifically that the employee’s performance is not affected by an engagement or interest in another business or occupation that, in the reasonable opinion of Employsure, may hinder or otherwise interfere with his performance (cl 18.2).

43. Employsure’s legitimate interest in the performance of Mr McMurchy’s duties included that he devote the whole of his skill, time and attention during normal business hours to his duties to Employsure (cl 5.1(a)), and that he observe the obligations imposed by cl 16.1 in respect of Employsure’s confidential information including, to keep any confidential information which he has received secret and confidential (cl 16.1(a)) and refrain from using it in any manner which will or may cause or be calculated to cause injury or loss to Employsure (cl 16.1(c)). Mr McMurchy acknowledged in the 2018 contract that confidential information will be disclosed to him (cl 16.2(a)), and that any further disclosure of such information may diminish the value of the confidential information and could materially harm Employsure (cl 16.2(b)). He had been promoted to a senior role within Employsure at the time of the 2018 contract, and in that position received materials that were highly confidential covering all aspects of Employsure’s business, and when promoted to the role of Manager of BrightHR in June 2019, he received particular information concerning the BrightHR product. In these circumstances, the appellants’ submission that Employsure did not have legitimate protectable interest in maintaining the confidentiality of such information, at least while Mr McMurchy was an employee, cannot be accepted.

44. The question posed by the covenant is whether Mr McMurchy proposed to engage in any other business or occupation relevantly, as an employee or consultant, that in the reasonable opinion of Employsure “may” hinder or interfere with the performance of his duties to Employsure. Undoubtedly, the engagement in other employment with ELMO may do so. By taking employment with ELMO to manage a sales team selling ELMO’s competing software product and to manage, whilst still employed by Employsure, ELMO’s support for users of Breathe software, Mr McMurchy proposed to do exactly what the covenant restrained.

45. It is not to the point, as the appellants submit, that the 2018 contract did not oblige Employsure to provide any work to Mr McMurchy during the three-month period of notice. Mr McMurchy could not properly perform his duties to Employsure, including as directed under cl 19.3, if he took up work with ELMO while on “gardening leave” since he was required by the 2018 contract to be available to respond to queries or problems and perform duties as requested by Employsure, whilst being paid his salary by Employsure. The pre-termination restraints in cll 5.1 and 18.2 read with cl 19.3, were not directed to a sterilisation of Mr McMurchy’s capacity. As Employsure correctly submitted, the restraints were directed at the absorption of Mr McMurchy’s capacity by securing the proper performance of his duties, including in respect of use of confidential information.

46. Given Employsure’s legitimate interest in the performance of Mr McMurchy’s duties during the pendency of the 2018 contract, including his confidentiality obligations, there was no error in finding that the pre-termination restraints were reasonable. Ground 1 should be rejected.

Ground 2: fiduciary obligations

47. Ground 2 is derivative on the outcome of ground 1. It contends that Mr McMurchy’s fiduciary obligations did not extend beyond his contractual obligations and, hence, if he was not contractually prohibited from accepting employment with ELMO, then he had no fiduciary obligation not to do so.

48. Given the conclusion above that the pre-termination restraint on outside employment was reasonable, ground 2 must be rejected.

Ground 3: post-employment restraint

49. Ground 3 challenges his Honour’s finding that the post-employment restraint in cl 20.1(b) was reasonable and therefore valid, for a period of six months after the termination of the 2018 contract. In reaching that conclusion, his Honour took the approach, consistent with authority such as Tullett Prebon at [66], that the period of “gardening leave” which Mr McMurchy was required to take during the contractual three-month period of notice was credited against the post-employment restraint.

The nature of a protectable interest

50. The nature of the interest meriting protection under a covenant in restraint of trade is discussed in Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343; [2018] NSWCA 163 at [64]-[65] (Gleeson JA, Bathurst CJ and Beazley P agreeing):

[64]   The nature of the interest meriting protection under a covenant in restraint of trade will differ according to the type of restraint under consideration. In Tullett Prebon (Australia) Pty Ltd v Purcell, a case involving restraints in an employment case, Brereton J said at [47]:

Whether a restraint is reasonable having regard to the interests of the parties depends on two, albeit related, considerations: first, whether the covenantee has a legitimate protectable interest, and secondly, whether the restraint is no more than reasonable for the legitimate protection of that interest. A covenantee is not entitled to be protected against mere competition; the legitimate interests which may be the subject of protection by covenant are in the nature of proprietary subject matter [Vandervell Products Ltd v McLeod [1957] RPC 185; Tank Lining Corporation v Dunlop Industries Ltd (1982) 40 OR (2d) 219; 140 DLR (3d) 659 at 664], including trade secrets and confidential information, and goodwill including customer connection.

[65]   However as Young JA explained in Sidameneo (No 456) Pty Ltd v Alexander at [31]-[32], the word “proprietary” is used in a special sense and will include legitimate commercial interests. In this regard, his Honour referred to the view he had expressed in Twenty-First Australia Inc v Shade (Supreme Court (NSW), Young J, 31 July 1998, unrep) and Stokely-Van Camp Inc v New Generation Beverages Pty Ltd (1998) 44 NSWLR 607 at 612-613.

51. Thus, as the primary judge stated at [96], protection against the misuse of confidential information or trade secrets to an employer’s detriment after the departure of an employee is recognised as a legitimate protectable interest that can justify a post-employment restraint, citing Woolworths v Olson at [67]; Pearson v HRX Holdings Pty Ltd (2012) 205 FCR 187; [2012] FCAFC 111 at [52]-[54].

52. In Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 at 1479, Lord Denning MR, after pointing out at 1478 that a master cannot stipulate for freedom from competition by an ex-servant or his new employer but can protect his trade secrets or his confidential information (citing Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 704, 709), said at 1479:

It is thus established that an employer can stipulate for protection against having his confidential information passed on to a rival in trade. But experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not: and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if limited to a short period. (Emphasis added.)

53. The present case falls into the category referred to by Hodgson JA in Miles v Genesys Wealth Advisors Ltd [2009] NSWCA 25; (2009) 201 IR 1 at [22], where “there is a restraint on engaging in certain conduct, by reference to the potentiality for confidential information to be used to the promisee’s detriment”. Hodgson JA explained, by reference to Kone which drew upon the remarks of Lord Denning MR in Littlewoods set out at [52] above, the different considerations applying in such cases from an equitable or contractual obligation of confidentiality or the existence of a trade secret. In the latter category of cases, it is plainly necessary to identify with some precision the confidential information.

54. By contrast, where the protectable interest is the potentiality for confidential information to be used to the employer’s detriment, it is not necessary for the employer to identify the confidential information with precision at the time the contract was entered into. As Edelman J said in Emeco International Pty Ltd v O’Shea (No 2) [2012] WASC 348; (2012) 225 IR 423 at [101]:

… the Court must be satisfied of the anticipated existence of confidential information at the time of the contract, and of potential prejudice to the employer’s interests from that information. But it is not necessary for an employer to identify that confidential information with precision.

55. In this case, his Honour was satisfied of the anticipated existence of confidential information at the time of the contract, given the acknowledgement by Mr McMurchy in cl 16.2 of the 2018 contract that confidential material would be disclosed to him: at [378]. That finding is not challenged.

56. His Honour was also satisfied of the potential prejudice to Employsure’s interests from that information being used by Mr McMurchy other than in the interests of Employsure, given:

1. Mr McMurchy’s role from 2018 as Outbound Sales Manager was to contribute to the development and execution of Employsure’s overall business strategy and plan, to engage with key stakeholders and become privy to Employsure’s strategic vision (at [378]) and that role was clearly a “senior” role involving a group of team leaders reporting to him, who in turn had about 100 sales staff reporting to them: at [379];

2. Mr McMurchy attended senior management team meetings and received team reports and materials that were highly confidential, covering all aspects of Employsure’s business: at [380];

3. Mr McMurchy obviously participated in the expansion of the Employsure business and must have gained intimate knowledge of its strategic strengths and weaknesses, and his appointment as Manager for BrightHR gave him a particular cachet in that he was involved in the launch, marketing and support of the BrightHR business in Australia: at [381]; and

4. Mr McMurchy was in a unique position to gauge the product’s shortcomings and its potential developments. He was also involved in its marketing and was exposed to confidential information in that regard which could be used by ELMO to the detriment of Employsure: at [381].

57. The appellants do not challenge these findings, other than the finding at [381] that the confidential information which, the appellants accept Mr McMurchy had received, “could be used by [ELMO] to the detriment of [Employsure]”. The appellants say that although Mr McMurchy was exposed to information of a kind identified by his Honour when he was appointed as manager of BrightHR in June 2019, that information was not and could not possibly have been of any use to ELMO because of material differences between the way in which its business, and that of Employsure, were structured and conducted.

58. The finding that Mr McMurchy was exposed to confidential information that could be used by ELMO to Employsure’s detriment was based on the unchallenged findings that Mr McMurchy was involved in the launch, development, marketing and support of the BrightHR product, and was in a unique position to judge the shortcomings and potential developments of BrightHR: at [381]. It is not to the point that the competing products were sold in different ways: Employsure, by the supply of consultancy services by subscription, including the BrightHR software, and ELMO by the sale of software only, including the Breathe software. Given the unchallenged finding that ELMO and Employsure were in competition in relation to the supply of the two software products, BrightHR and Breathe, there was no error in finding that the confidential information to which Mr McMurchy had access, including about the marketing, shortcomings and potential developments of the BrightHR software could be used by ELMO to the detriment of Employsure.

Reasonableness of the competitor restraint

59. Alternatively, the appellants submit that the finding that Mr McMurchy had been exposed to confidential information which could be used by ELMO to the detriment of Employsure, does not support the competitor restraint in cl 20.1(b).

60. The appellants accept that in an appropriate case, evidence of what actually happened during the life of a contract can throw light on what the parties might reasonably have contemplated when the contract was made. However, they say that there are no findings that make that connection in this case and the temporal focus of the finding at [381] is exclusively after the date when the 2018 contract was made.

61. The appellants also accept that future competition that was reasonably foreseeable or contemplated as at the contract date could properly be taken into account in determining the scope of Employsure’s protectable interests: Sidameneo (No 456) Pty Ltd v Alexander [2011] NSWCA 418 at [71]. However, they say that there is no finding that, as at the contract date, that parties reasonably had in contemplation that 20 months later ELMO would enter into an entirely new business.

62. The appellants submit that it was necessary for Employsure to show that such confidential information had the potential to be used to its detriment by a particular competitor or at least a particular type of competitor that existed at the time of entry into the contract, or which was reasonably foreseeable at that time, and that Employsure failed to lead evidence to meet that additional requirement.

63. The appellants’ submissions ignored the object sought to be attained by the restraint in cl 20.1(b). That object is described in the passage from the judgment of Lord Denning MR in Littlewoods referred to at [52] above, namely, to protect Employsure’s confidential information by taking a covenant from the employee by which he is not to go to work for a rival in trade, answering the description of a “business or prospective business in competition with [Employsure] at the time of termination of employment”: cl 20.1(b). Thus, if there is no such business in competition with Employsure at the time of termination of employment, then the restraint has no operation.

64. The appellants say that a “floating” reference to competitors in a restraint to guard against an entirely abstract possibility that they might later come to exist cannot be enough to demonstrate the reasonableness of the restraint as at the date of the contract. This submission cannot be accepted.

65. What is reasonably foreseeable at the time of the contract requires an objective assessment of “the best estimate which [the parties] could then make of the future”: Lindner v Murdock’s Garage (1950) 83 CLR 628 at 653 (Kitto J); [1950] HCA 48, citing Putsman v Taylor [1927] 1 KB 637 at 643. That the parties expressly agreed that the competitor restraint would be triggered only if there was competition, relevantly, at the date of termination, justifies an inference that the parties contemplated when they entered into the restraint that there was a future possibility that, at the time of termination of that contract, there would be businesses or prospective businesses in competition with Employsure. Contrary to the appellants’ submissions, it was unnecessary for Employsure to prove that it had specific competitors in February 2018, or the projected future development of the market.

66. Thus, in assessing the reasonableness of the restraint at the time of entry, it is relevant to have regard to the fact that it would only operate if there was in fact competition at the time of termination of the employment.

67. His Honour correctly directed himself to the reasonableness of the restraint at the time of entering into the 2018 contract (at [93], [378]-[380]). His Honour took into account that at the time the restraint was agreed, Mr McMurchy was promoted to the position of Outbound Sales Manager, which was a senior role, and in that role, he was to contribute to the development and execution of Employsure’s overall business strategy and plan and was required to engage with key stakeholders; and he was to receive highly confidential information covering all aspects of Employsure’s business: at [378]-[380]. That Mr McMurchy in fact received highly confidential information throws light on what may fairly have been contemplated on a reasonable view of what the restraint means: J D Heydon, The Restraint of Trade Doctrine (2018, 4^th ed, LexisNexis Butterworths) at 48-49.

Duration of the restraint

68. The appellants’ challenge to the duration of the restraint is put on an “all only or nothing” basis; the appellants do not submit that the restraint is reasonable only for a lesser period than nine months.

69. In assessing the reasonableness of the duration of the restraint, his Honour gave significant but not conclusive weight to the parties’ agreement to a restraint of twelve months: at [382]. There was no error in doing so: Woolworths v Olson at [39]. Next, his Honour noted that an assessment must be made as to the length of time Employsure’s confidential information “remains current and of a commercial advantage”: at [383]. Again, there was no error in that approach: Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9; [2006] NSWSC 717 at [36] (Brereton J). In reading down the restraint to nine months, his Honour gave the following reasons:

[383]   ... I accept that Mr McMurchy was in a position where he was to support and deliver strategy and to that end would have had and been interested to have a real interest in commercially sensitive information. But there can be long-term and short-term strategies and of course strategies change.

[384]   Mr McMurchy was working for the Plaintiff at a key moment in the development of BrightHR but there must be an element of reality attaching to placing too much weight on the possibility that a departing employee could retain information for too long apart from the information arguably becoming outdated. It may be accepted that strategic considerations may fall into a slightly different category. In all the circumstances and given the nature of the confidential information in this case and Mr McMurchy’s status I consider a period of nine months’ restraint in the circumstances, beginning on 12 January 2021.

70. The finding that a restraint of nine months from 12 January 2021 was reasonable (that is, six months from termination of employment) involved an evaluative assessment by his Honour who, relevantly, took into account the contractual consensus of a longer restraint of 12 months (Woolworths v Olson at [39]), the length of time Employsure’s confidential information remained current and of a commercial advantage (Cactus at [36]), and had regard to the nature of that information and Mr McMurchy’s status as Manager of BrightHR. Contrary to the appellants’ submission, this finding was not “effectively plucked from nothing”. No error has been shown in his Honour’s evaluative conclusion that the restraint should operate for nine months, that is, six months from termination of Mr McMurchy’s employment. Ground 3 is not made out.

Ground 4: challenge to declaratory relief

71. Ground 4 challenges his Honour’s finding and declaration 5 (reflecting enforcement of the competitor restraint) that Mr McMurchy was restrained from being employed by ELMO for a period of six months after the termination of the 2018 contract which took effect on 12 April 2021. Declaration 5 was in the following terms:

5.   A declaration that between 12 April 2021 and 11 October 2021, the first defendant was restrained, in Australia, from carrying on or being engaged, concerned or interested directly or indirectly in any capacity specified in paragraph (a) below in any business or activity in paragraph (b) below:

(a)   As principal; sole trader; partner director or shareholder (other than as an ordinary shareholder in a publicly listed company); unit holder; manager; employee; employer; agent or consultant;

(b)   In any business or prospective business in competition with the Plaintiff or any Related Body Corporate (as that term is defined in the Corporations Act 2001 (Cth)) at the time of termination of employment.

72. The alleged errors particularised under this ground are that this finding (a) was not open on the evidence, (b) did not engage with the appellants’ submissions to the contrary, and (c) was not supported by sufficient reasons.

73. The appellants’ contentions in (b) and (c) above cannot be accepted. After recording the appellants’ submissions as to why the restraint should not be enforced even if held to be valid (at [267]-[269]), and finding that the competitor restraint was reasonable, his Honour addressed the discretion to enforce the restraint, stating the question as, “if and to what extent I should grant injunctive relief”: at [423]. Plainly, in exercising the discretion to grant or withhold injunctive relief, his Honour correctly had regard to the circumstances as at the date of the hearing: Tullett Prebon at [88]. His Honour gave the following reasons for determining that injunctive relief was appropriate (at [424]):

It is impossible to evaluate precisely what specific confidential information either Mr McMurchy or for that matter Mr Kumaran have in their heads. But I consider that when Mr McMurchy was with the Plaintiff he played such an integral role in the development of the strategy and positioning of BrightHR and he had such a vested interest in those activities that it is highly likely he has retained an unspecified but nonetheless an amount of material information. The other factor which is here relevant is that he and Mr Kumaran will now apply their contractual and fiduciary obligations in the interest of the second defendant. Even on their own I would consider injunctive relief appropriate but together I consider it would be even more appropriate to restrain the real possibility of them using acquired knowledge and familiarity with the Plaintiff’s confidential information.

74. Ultimately an injunction was not necessary because by the time orders were made the period for which his Honour had found the restraint in cl 20.1(b) to be valid had expired. Thus, the relevant question is whether his Honour erred in making a declaration reflecting enforcement of the competitor restraint for six months after the termination of Mr McMurchy’s employment on 12 April 2021.

75. A declaration is a discretionary remedy. As stated in the joint judgment in Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581-582; [1992] HCA 10:

It is now accepted that superior courts have inherent power to grant declaratory relief. It is a discretionary power which “it is neither possible nor desirable to fetter… by laying down rules as to the manner of its exercise”. However, it is confined by the considerations which mark out the boundaries of judicial power. Hence, declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. (Citations omitted).

76. Power to grant a declaration, is conferred on the Supreme Court by s 75 of the Supreme Court Act. It has been said that the factors which influence the exercise of the discretion are not the same as would apply to the consideration as to whether or not to grant an equitable remedy: Young, Croft and Smith, On Equity (2009, Lawbook Co) at [16.820].

77. In this case, the suggested barriers to the grant of a declaration were not considerations such as: lack of utility, the question is theoretical, or a declaration will not resolve any dispute between the parties. As his Honour summarised at [267]-[270], the appellants relied upon three factors in their written closing submissions that were said to mitigate against enforcing the competitor restraint by injunction at all or in full:

1. there is no likelihood that Mr McMurchy will remember confidential information in a form that could be used;

2. the period on which Mr McMurchy has been on “gardening leave” since 12 January 2021 should be credited against the time for which the restraint might be enforced; and

3. delay.

78. In addition, in oral closing submissions senior counsel for the appellants said that “there is nothing there from which it could be inferred that any of that information [pertaining to Bright] could possibly be of use to ELMO in a way that would justify ordering or compelling these men not to work for ELMO” (Emphasis added).

79. Addressing these discretionary considerations, his Honour:

1. rejected the first matter which, in effect, asserted the absence of a protectable interest as at the date of the hearing, finding that it was highly likely that Mr McMurchy retained an amount of material information, albeit an unspecified amount: at [424];

2. accepted the second matter, and credited the period of gardening leave against the time for which the restraint was enforced;

3. implicitly, and correctly, rejected the third factor alleging delay; and

4. rejected the appellants’ submission that the information relating to BrightHR could be of no use to ELMO, finding at [424] that there was a “real possibility” of Mr McMurchy using acquired knowledge and familiarity with Employsure’s confidential information in his new role with ELMO.

80. The appellants challenge the findings referred to in (1) and (4) above.

81. As to (1) above, the appellants say that this finding was not open because Mr McMurchy denied that he had retained any such information in his memory, and his denial was unchallenged, was not contradicted and is not inherently improbable. This submission ignored that Mr McMurchy’s evidence as to not having any memory of Employsure’s confidential information was directed to its customer database and other documents such as spreadsheets and training manuals, not to Employsure’s confidential information more generally. As to the latter category of information his Honour took into account that not too much weight could be placed on a departing employee retaining information for too long apart from the information arguably becoming outdated: at [384].

82. There was no error in finding that as at the date of the hearing Employsure had a protectable interest in the confidential information disclosed to Mr McMurchy, given his Honour’s findings that Mr McMurchy was likely to have retained information as to product strengths and weaknesses, developments and marketing in relation to the BrightHR product: at [381], [424].

83. As to (4) above, the appellants say that the “use” proposition was never put to Mr McMurchy or any witness called by the appellants, and Employsure did not lead or tender any evidence on which the finding could properly be supported. The complaint about the absence of cross-examination is misconceived. The finding that there was a “real possibility” of Mr McMurchy using Employsure’s confidential information was based on an inference as to Mr McMurchy’s likely future conduct as an employee of ELMO, given the nature of the confidential information held by him in respect of BrightHR, a competing software product to Breathe, which Mr McMurchy was responsible for managing ELMO’s sales team and support for users of Breathe. That inference was well open to his Honour in circumstances where his Honour had found that Mr McMurchy had played an integral role in the development of the strategy and positioning of BrightHR, a competitor product to Breathe, it was highly likely that he had retained an amount of material information, and he was now subject to contractual and fiduciary duties to act in the interests of ELMO which was supplying a product in competition to Employsure.

84. The complaint that Employsure did not adduce any evidence on which this finding could properly be supported is unsound. It ignored the findings by his Honour (at [380]-[381] and [383]-[384]) as to the nature and currency of the confidential information retained by Mr McMurchy and his status as Manager of BrightHR.

85. Compelling reasons are required to persuade a court to decline injunctive relief in relation to the enforcement of a restraint such as in the present case: Maitland Main Collieries Pty Ltd v Hunter Valley Coal Corporation Pty Ltd [2006] NSWCA 258 at [62] (Mason P, Handley and Beazley JJA agreeing). There was no error in finding that injunctive relief enforcing the restraint should be granted for a period of six months from the termination of Mr McMurchy’s employment. Nor was there any error in granting a declaration to that effect, in lieu of an injunction, given that an injunction was no longer necessary by the time orders were made: see [74] above. Ground 4 is not made out.

Grounds 5-6: whether Mr McMurchy induced or encouraged Mr Kumaran to leave his employment

86. Ground 5 challenges the finding and declaration 3 that Mr McMurchy had breached his contractual and fiduciary duties to Employsure by encouraging and inducing Mr Kumaran to leave his employment with Employsure. Declaration 3 was in the following terms:

3. A declaration that during the Employment the first defendant breached:

(a)   clause 5.1(b) and (c) of the 2018 Employment Agreement;

(b)   his implied duty of fidelity and good faith; and

(c)   his fiduciary duties to the plaintiff,

by encouraging and inducing Mr Arumugam Kumaran to leave his employment with the plaintiff in order to take up employment with the second defendant.

87. Ground 6 contends, in the alternative to ground 5, that if Mr McMurchy encouraged or induced Mr Kumaran to leave his employment with Employsure, such conduct was not a breach of his contractual and fiduciary duties to Employsure.

88. The factual question raised by ground 5 is whether Mr Kumaran had already independently decided to leave Employsure before Mr McMurchy contacted him and advised him of an “exciting” opportunity to work with him at ELMO. The question raised by ground 6 is whether, if that finding stands, Mr McMurchy was in breach of his contractual and fiduciary obligations by doing so.

Ground 5

89. His Honour’s conclusion that Mr McMurchy breached cl 5.1(b) and (c) of his contract and his implied obligation of fidelity and good faith by his communications with Mr Kumaran seeking to persuade him to resign and accept a position with ELMO, was based on the following findings:

• on 14 December 2020 Mr McMurchy offered to supply ELMO with the names of potential sales employees. There had been a discussion between Mr McMurchy and Mr Shevere in which Mr Kumaran had been mentioned: at [389];

• in any event Mr McMurchy responded to Mr Shevers later on 14 December, where he mentioned three employees, Mr Kumaran being one, and Mr McMurchy and Mr Shevers communicated again the next day, by message, from which it may reasonably be inferred there was some further discussion. Mr Shevers was not called in the proceedings and Mr McMurchy said nothing about the matter in evidence: at [390];

• on the next day Mr McMurchy wrote to Mr Shevers indicating that each of the three employees previously mentioned (importantly Mr Kumaran) were “very keen on the role and opportunity”: at [391];

• it may reasonably be inferred from that communication that Mr McMurchy could only have communicated in those terms if he had approached them about a role with the second defendant and that they were interested: at [392];

• Mr McMurchy called Mr Kumaran at about the time he provided Mr Kumaran’s name to Mr Shevers as potential candidate to tell him he was leaving Employsure and that he was taking up a position with ELMO (at Breathe) and that it would be a good opportunity for him. He also told him how exciting the opportunity was, and he explained to Mr Kumaran what the role and opportunity with ELMO was: at [394]; and

• Mr McMurchy both identified Mr Kumaran as a potential target for ELMO and by the very approach and words he used set out to encourage Mr Kumaran to join him in his new “exciting employment”: at [395].

90. His Honour rejected the appellants’ submission that Mr Kumaran made an independent decision to resign from Employsure, giving the following reasons at [395]-[398]:

[395]   Here it is put that Mr Kumaran had independently decided to leave his employment. However there is no doubt in my mind that Mr McMurchy both identified Mr Kumaran as a potential target for the second defendant and he, by the very approach and words used, set out to encourage Mr Kumaran to join him in his new “exciting” employment, (Mr McMurchy, T.101/42-45,T.140/6-17 and Mr Kumaran, T.228/43-45).

[396]   And whilst I accept Mr Kumaran might have been disgruntled at not being promoted by the Plaintiff I do not on the evidence consider he had made a decision to leave apart from considering his options and he had not applied for any positions, (Mr Kumaran, T.226/1-3).

[397]   In any event I am also not satisfied that Mr McMurchy could have come to the conclusion that at the time he spoke with Mr Kumaran, he had decided to leave the Plaintiff’s employ, T.101/4.

[398]   Whilst Mr Kumaran may have been less than impressed with the Plaintiff at the time Mr McMurchy spoke with him he was clearly susceptible to Mr McMurchy’s approach and was “ripe for the picking”. To that extent, the Plaintiff was entitled to expect that Mr McMurchy would [not] attempt to entice employees away. Here there is no suggestion in my view on the evidence that Mr Kumaran had decided to leave let alone know about an opportunity at the second defendant were it not for Mr McMurchy.

91. The appellants challenge the findings at [396] and [397]. They submit that it was not open to his Honour to find that Mr Kumaran had not already independently decided to leave Employsure before Mr McMurchy contacted him. They say that the unchallenged evidence of Mr Kumaran that he was weary of his job at Employsure and had “realised” [his] time at Employsure had come to an end” should have been accepted, and his Honour does not explain why it was not.

92. Contrary to the appellants’ submission, his Honour did not ignore Mr Kumaran’s evidence and gave reasons for his findings. His Honour accepted that Mr Kumaran might have been disgruntled by not being promoted by Employsure, that he may have been less than impressed with Employsure at the time Mr McMurchy spoke with him and that he was clearly susceptible to Mr McMurchy’s approach. Nevertheless, having reviewed Mr Kumaran’s evidence, his Honour found that Mr Kumaran had not made a decision to leave, but rather had considered his options and had not applied for any positions: at [396]. That finding was open on the evidence. Mr Kumaran referred in cross-examination to having conversations with a couple of friends about outside roles “over lunch” in 2020 and acknowledged that he had not formally applied for any other positions outside Employsure, other than with ELMO. The challenge to the findings at [396]-[397] should be rejected.

93. Next, the appellants submit that there was no finding, and no direct or inferential evidence on which a finding could have been based, that Mr McMurchy’s conduct in a single telephone conversation with Mr Kumaran materially influenced Mr Kumaran’s decision to leave Employsure or to take up employment with ELMO. This submission ignored three matters.

94. First, his Honour found that that Mr McMurchy encouraged Mr Kumaran to leave Employsure to join him in his new “exciting” employment with ELMO: at [395].

95. Second, Mr McMurchy gave evidence in cross-examination that he told Mr Kumaran that he would be a good addition to the team at Breathe and he knew Mr Kumaran “would be attracted to it if I put him onto Michael [Shevers]”. Mr McMurchy told Mr Shevers in his subsequent Linkedin message on 16 December 2020 that Mr Kumaran and two others were “looking out for your message when you are ready” and were “very keen on the role and opportunity”.

96. Third, his Honour concluded (at [432]) that Mr McMurchy “took an active part in ensuring Mr Kumaran left his employment with [Employsure], for [ELMO], in breach of his contract”, which was supported by the reasoning at [397]-[398], specifically, that Mr Kumaran was susceptible to Mr McMurchy’s approach and was “ripe for the picking”. That is, Mr McMurchy’s approach to Mr Kumaran materiality influenced Mr Kumaran to leave Employsure and join ELMO. Ground 5 is not made out.

Ground 6

97. The appellants say, by reference to Hodgson v Amcor Ltd [2012] VSC 94; (2012) 264 FLR 1 at [1512]-[1513], that Mr McMurchy was entitled, while employed by Employsure, to discuss and pursue employment opportunities with other potential employers (including, if it be relevant, competitors of Employsure), whether acting alone or together with other employees of Employsure.

98. The submission continued that there is no breach of an implied contractual duty of fidelity or fiduciary duty where one employee aids another employee to find new employment, including by facilitating contact with prospective new employers, when (as here) the second employee has independently made a decision to leave his current employment, citing Hodgson v Amcor Ltd at [1517]-[1518].

99. Hodgson v Amcor, relevantly, involved claims by Amcor against Mr Hodgson that he had breached his duty whilst still an employee in taking steps to establish a consultancy business with the intention of providing consultancy services to Carter Holt Harvey (CHH), an Amcor competitor, and had enticed four employees to work in that business. Vickery J found that meetings and other contacts with officers of CHH did occur prior to the termination of Hodgson’s employment on 1 October 2004 and there was evidence of other preparations for the proposed new enterprise being undertaken during this time, however, the conduct during the relevant period did not go beyond the bounds of preliminary preparation and there was no evidence of any competitive activity or actual trading in the nature of provision of consultancy services: at [1510]-[1511]. That was the context in which his Honour said at [1512]:

Such conduct as did occur, in and of it itself, does not disclose any breach of contract or fiduciary duty owed to Amcor. On the authorities previously considered, an employee does not breach any fiduciary duty owed to his or her employer by pursuing, whilst employed, employment opportunities with other potential employers including such opportunities with competitors of the current employer.

100. Nothing in Hodgson at [1512] assists the appellants’ argument. The appellants seized upon the next paragraph at [1513] where Vickery J said:

I accept that prior to 1 October 2004, Hodgson was entitled to discuss and pursue future employment opportunities with any employer, including a competitor of Amcor such as CHH or with a consultancy of the kind proposed by AMCG, even if the consultancy was proposed to offer services to a competitor of Amcor. Further, Hodgson was entitled to do this, either acting alone, or together with other employees of Amcor at the time. (Emphasis added)

101. The statement by his Honour in the last sentence of [1513] that Mr Hodgson was entitled to have discussions with CHH “together with other employees” is to be understood in the context of the facts in that case and the specific findings that none of the employees had breached their contractual or fiduciary duties in taking preparatory steps in pursuing opportunities with a competitor of Amcor, such as CHH. It should not be read as if his Honour was stating some general principle.

102. Importantly, his Honour’s statement in [1513] was not addressing the claim of breach of duty based on enticing a second employee to leave employment for another business. As to that claim, Vickery J was not satisfied on the evidence that the relevant employees had been enticed to work for another business. His Honour found that the evidence of the four employees was that all of them had decided on their own account to leave Amcor, and that this was supported by documentary evidence: at [1516]. After characterising these circumstances as the “usual case” where the second employee has independently made a decision to leave his current employment, Vickery J said of such a case at [1517]-[1518]:

I accept the submissions of the Defendants on this issue. In the usual case, no breach of contract or fiduciary duty arises where one employee aids another employee in circumstances where the second employee has independently made a decision to leave his current employment.

In AMP Services Ltd v Manning the defendant employee had given notice to her employer and had facilitated contact between her prospective new employer and members of her team who had told her that they also wished to leave their employment. This conduct was held to involve no breach of her contract or of any fiduciary duty owed by her to her employer. Finkelstein J in Manning analysed the facts before him in the following way ([at [59]):

Arrive [the former employer] also alleges that by assisting members of the group to find employment with GSJBW [another business] (for example, by putting them into contact with Mr Moir) Ms Manning acted in breach of fiduciary duty. It is true that Ms Manning provided members of her group with assistance in that regard. I do not, however, accept that this assistance amounts to a breach of duty. There is nothing wrong in helping a person find new employment in circumstances where that person has independently made the decision to leave his current employment. (Emphasis added)

103. The proposition in AMP Services Ltd v Manning [2006] FCA 256 at [59], which Vickery J accepted in Hodgson, is that “there is nothing wrong in helping a person find new employment in circumstances where that person has independently made the decision to leave his current employment”. It is not necessary to consider whether this proposition is universal or should be subject to any qualifications in specific factual situations. It is sufficient to observe that the present case is distinguishable on the facts from both Manning and Hodgson.

104. Here, there are findings that Mr McMurchy did encourage and entice Mr Kumaran to join him at ELMO, and that Mr Kumaran had not independently decided to leave Employsure and join ELMO before Mr McMurchy contacted him. Although his Honour recorded the parties’ submissions with reference to Hodgson (at [208]-[209]), but did not make an express finding distinguishing Hodgson, given the findings just mentioned, there was no error in his Honour’s implicit rejection of the appellants’ submissions based on Hodgson. Ground 6 is not made out.

Ground 7: finding of loss

105. Ground 7 contends, in the alternative to grounds 5 and 6, that his Honour erred in finding that Employsure had suffered loss or damage when Mr Kumaran resigned from its employment and took up employment with ELMO. This ground challenges the finding at [407]:

There is no doubt the plaintiff has suffered loss in Mr Kumaran resigning. He was an employee who had to be replaced at the expense to the plaintiff.

106. Given that the appeal by Mr McMurchy has failed and there is to be a further hearing on the quantum of loss, this ground goes nowhere as it does not support any challenge to the orders made on 26 October 2021.

107. In any event, the appellants’ submission that the issue of loss (as distinct from quantum) was not before his Honour, is unsound. As his Honour recorded (at [236]), the appellants submitted below that any breach by Mr McMurchy could only result in nominal damages. The finding of some loss does not trespass upon the question of quantum of damages, which was to be determined separately and after the final hearing.

108. The appellants also say that the finding of loss assumes, incorrectly, that but for Mr McMurchy’s actions, there would never have been any need for Employsure to replace Mr Kumaran. This submission ignored that the causation question was resolved against the appellants by his Honour’s finding that “it was not until Mr McMurchy directed [Mr Kumaran] to [ELMO] that he made a decision to leave”: at [432]. Ground 7 is not made out.

Ground 8: liability of ELMO

109. Ground 8 contends that if his Honour erred in declaring that Mr McMurchy breached his fiduciary and contractual duties, the judge also erred in finding and declaring that ELMO knowingly assisted or induced Mr McMurchy to breach his contract. Given the conclusion above on grounds 5 and 6, this ground does not arise.

Conclusion

110. The appeal by Mr McMurchy and ELMO has failed. There is no reason why costs should not follow the event of each appeal: UCPR, r 42.1.

B. The Kumaran / ELMO appeal

Issues on appeal

111. The appeal by Mr Kumaran and ELMO raises two issues:

1. whether the post-employment restraint in Mr Kumaran’s contract was reasonable and therefore valid (ground 1); and

2. whether the primary judge erred in the exercise of his discretion to grant injunctive relief enforcing the restraint for a period of nine months after the termination of the contract (ground 2).

Ground 1: reasonableness of the competitor restraint

112. His Honour gave brief reasons for finding that the competitor restraint was reasonable. This possibly reflected the relative brevity of the parties’ closing written submissions in the Kumaran proceedings.

113. After finding that Mr Kumaran was expected to be exposed to highly confidential information in his various roles at the time of his contract, as reflected in the confidentiality obligation contained in the contract (at [417]), his Honour found that Employsure had a legitimate protectable interest in the confidential information to which Mr Kumaran had access, giving the following reasons:

[418]   The coalescence between the Plaintiff’s growth and Mr Kumaran’s promotion and ambitions is the very dynamic it is reasonable to suppose the parties contemplated at the time the contract was entered. The restraints imposed upon and agreed to by Mr Kumaran to protect the use or misuse of the Plaintiff’s confidential material were entirely reasonable on the Plaintiff’s part.

[419] There is no doubt that at the very least in his final role as a “sales partner” he had access to a good deal of confidential material about digital marketing and the strategies and productivity of the inbound sales teams, Affidavit of Morris, 24 March 2021, [90]-[98] and the emails at CB5:1542,1544.

[420]   He was intimately involved in the needs and potential needs of customers and he made himself aware no doubt of customer data including their identities and dealings.

[421]   There is no doubt that the Plaintiff has a legitimate interest in the protection of its confidential information to which he has and indeed it was reasonably contemplated he would have access to.

114. His Honour read down the restraint to nine months, giving the following reasons:

[422]   Mr Kumaran agreed to a 12-month restraint. Again, that is important but not conclusive. The length of the restraint depends on the time the employers’ information will remain current. Given his status I am of the view that much of what he may have been exposed to will have evaporated from his head and in the circumstances a nine-month restraint is sufficient and I would read down the contract accordingly.

115. It is convenient first to address the appellants’ challenges to the factual findings at [419]-[420]. To the extent that I conclude that some of these challenges are successful, the relevance of that success to the grounds of appeal is addressed below.

Challenge to factual findings

116. His Honour’s finding at [419] was based on the affidavit evidence of Mr Michael Morris (at [90]-[98]), a director of Employsure, and two emails to the Inbound Sales team, including Mr Kumaran, dated 18 and 29 January 2021.

117. The appellants say that the finding at [419] that Mr Kumaran had access to confidential information about “digital marketing” and “strategies and productivity of the inbound sales team” was made in general and conclusory terms, the finding about “digital marketing” was not open in the face of Mr Kumaran’s unchallenged evidence that he had no knowledge of Employsure’s digital marketing strategy, and the finding about “strategies” was not open, given Mr Kumaran’s unchallenged evidence was that he denied any knowledge of the digital marketing strategy.

“Digital marketing”

118. Mr Morris gave evidence about Employsure’s “digital marketing” (at [95]-[96]). He said that Mr Kumaran obtained knowledge of the problems and/or needs of Employsure’s prospective customers, which fed into Employsure’s search engine marketing strategies, including identifying key words for search engine optimisation. Mr Kumaran’s unchallenged response, to which his Honour did not expressly refer, was that he did not know what Employsure’s digital marketing strategy was, as he had nothing to do with marketing.

119. Employsure says that there was no need to challenge Mr Kumaran’s evidence as it was admitted on the basis of his understanding and belief and therefore was not relevant, and the objective fact that he did receive such knowledge was established by Mr Morris’ evidence. That cannot be accepted for several reasons.

120. First, Mr Kumaran’s evidence was clearly relevant to whether he had knowledge of Employsure’s digital marketing; that the evidence was of his belief and understanding was relevant to the weight to be attached to such evidence. Second and importantly, Mr Morris did not contradict Mr Kumaran’s evidence; the knowledge which Mr Kumaran acquired at the telemarketing level of the problems and/or needs of Employsure’s prospective customers cannot be equated with knowledge of Employsure’s search engine marketing strategies, such as identifying keywords. Third, as the appellants correctly submit, Mr Kumaran’s evidence is inherently plausible, given the limited scope and relative modesty of his role.

121. The finding that Mr Kumaran had access to confidential information about Employsure’s “digital marketing” should be set aside.

“Strategies” of the Inbound Sales team

122. Mr Morris gave evidence (at [90]-[94]) concerning the sales process used by Employsure to convert leads in respect of a prospective customer who contacted Employsure and progressing these leads to the stage of speaking with a business development manager. Mr Kumaran was part of this process as a partner in the Inbound Sales team. All the telephone conversations that Mr Kumaran had with respective customers were recorded. Mr David Oxley, the technology director employed by Employsure, gave affidavit evidence of a report which found that 5,431 outbound telephone calls were made by Mr Kumaran between 1 October 2019 and 11 February 2021, in which the key word “Bright” was used 77 times and “BrightHR” used 9 times.

123. Transcripts were made of some of those conversations and, at trial, Employsure tendered five such transcripts. Having reviewed the five transcripts, it is apparent that there are very few references by Mr Kumaran to the BrightHR product in his conversations with prospective customers. Such reference as were made, were expressed at a high level of generality. Extracts from two of the transcripts are sufficient to make the point:

10 December 2019

Mr Kumaran (29:55): Yeah, we do health and safety as well. Yep. And we've also just put together an application for all your timekeeping.

…

Mr Kumaran (30:47): Yeah. So, the BrightHR app that we just put out, that covers yourself against a lot of the record keeping that you have. And I think that the two biggest feedbacks that we've gotten from that from small businesses is one, they love that it's automated. But second to that, it just provides them unlimited document storage, which is one of the big things that when we were talking about, as far as the storage piece, as a small business, everyone's moving towards the Cloud. And I guess being charged for that is a frustrating thing, but when you're having the unlimited access, I guess it's just been a beneficial thing.

11 August 2020

Mr Kumaran (05:23): Yeah, yeah, I think the main thing is really taking that proactive response. Yeah, I guess alongside that, what we found is with the smaller businesses, it's really making sure that you guys have that I guess one, that soundboard, but also that access to just the support at the right time. Yeah, I mean, look, if you're open to it, we'd love to maybe give you a call, just show you how we've changed a little bit. But alongside that, when we last spoke to you, I think we just had the HR aspect and the work health and safety.

Mr Kumaran (05:52): In the meantime, we've actually introduced Bright HR. So, we've acquired Bright HR. Which is like, I don’t know if you've ever heard of like Deputy or anyone like that, but we now have like the timekeeping, the rostering, all those aspects there within the mobile app. So, they're all included into the service. What I'll do is first and foremost, let me fire across the email with the national minimum wage increase, so you've got that information there. What might be a good time maybe to give you a call then maybe just run you through, just give you a bit of an update on how we change (emphasis added).

124. Mr Morris did not identify any information received by Mr Kumaran about Employsure’s “strategies” for its Inbound Sales team that could be regarded as confidential information. Nor do the five transcripts support such a finding. The “strategies” finding should be set aside.

“Productivity” of the Inbound Sales team

125. The appellants also challenge the finding that Mr Kumaran had access to information about the “productivity” of the Inbound Sales team. Mr Morris gave evidence (at 100]) that Mr Kumaran was aware of the performance of his former team as a whole and that of individual members in the team, and emails were distributed to team members, including Mr Kumaran, that show who the top performers in the team were. The appellants say that this is the epitome of the personal experience that an employee is entitled to use.

126. Employsure correctly submits that the finding goes further than Mr Kumaran’s experience of his co-workers; it is based on specific charts that were provided to Mr Kumaran by email, such as in January 2021, that detailed the weekly performance of team members and the team as a whole. This challenge is rejected.

Customer data, identities and dealings

127. The appellants say that the finding at [420] that Mr Kumaran “… made himself aware no doubt of customer data including their identities and dealings” was not open, given Mr Kumaran’s unchallenged and uncontroversial evidence that he had no need to and did not memorise the details of prospective customers. However, the appellants omitted reference to the context of this evidence. Mr Kumaran gave evidence that the name of the prospective client and their contact details remained available to him for four days on his screen and after that time their details were no longer available to him and were provided to the Outbound Sales division and worked on by that division.

128. Employsure’s response is that that the finding is correct, given the evidence of Mr Kumaran that he had discussions with multiple potential customers each day in his final role and that the information about them remained available to him for a short period thereafter. This challenge is rejected.

The standard of appellate review

129. Neither party directed submissions to the standard of appellate review which applies with respect to this Court’s consideration of the reasonableness of the restraint.

130. Although the process of the primary judge’s reasoning can be described as evaluative, the test for establishing error with respect to the reasonableness of the restraint is the general “correctness” standard of review in Warren v Coombes (1979) 142 CLR 531; [1979] HCA 9, rather than the “deferential standard” which tolerates a range of outcomes, because the reasonableness of the restraint calls for a decision where there is one correct answer, or adopting the language of Gageler J in Minister for Immigration and Border Protection v SZVFW (2018) 264 CLR 541; [2018] HCA 30 at [49], “a unique outcome”; see also Sun v Chapman [2022] NSWCA 132 at [8]-[13] (Leeming JA), [114]-[117] (White JA) and [189] (Brereton JA).

The appellants’ submissions

131. The appellants’ challenge to the reasonableness of the competitor restraint relied upon the following essential propositions:

1. the restraint could be justified only upon proof by Employsure that it was reasonably contemplated at the time of the restraint that Mr Kumaran would have access in the course of his employment to information that was entitled to protection by a restraint against competition;

2. Employsure had failed to demonstrate that Mr Kumaran had access to confidential information that could be used by ELMO (the only ‘competitor’ that was proved to exist, or about which there was any evidence) to Employsure’s detriment, and that had the capacity to cause real or significant harm to Employsure if it were disclosed to ELMO;

3. Employsure had merely asserted that it was entitled to protect an accumulated mass of knowledge which it regarded as confidential and this was not sufficient to justify the restraint; and

4. there was no finding – and on the evidence none could properly have been made – that any of the information could be used by ELMO to the detriment of Employsure.

Protectable interest in confidential information

132. As to (1) above, the appellants say that the finding at [421] that Employsure had a legitimate interest in the protection of its confidential information is not supported by any reasoning as to why that is so, and that his Honour did not engage with their submissions to the contrary. Those submissions cannot be accepted.

133. The finding that Employsure had a legitimate interest in its confidential information which was entitled to protection by a restraint against competition was based on the unchallenged findings (at [417] and [418]) that it was reasonably contemplated by the parties at the time of the contract that Mr Kumaran would have access to confidential information, and that having regard to Employsure’s growth the parties contemplated that Mr Kumaran could be promoted during his employment. There is no error in these findings.

Whether potential for detrimental use of confidential information by ELMO

134. It is convenient to address (2) and (4) above together as these propositions are connected. The appellants’ argument that Employsure failed to demonstrate that Mr Kumaran had access to confidential information that could be used by ELMO to Employsure’s detriment, involves a misconception as to the assessment of the reasonableness of the restraint.

135. In accordance with the approach correctly stated at [93] of the judgment, his Honour assessed the reasonableness of the restraint at the time of entry into the contract, taking into account future probabilities that could have been foreseen, citing Woolworths v Olson at [40]. As noted, his Honour found (at [418]) that the parties contemplated that Mr Kumaran could be promoted during his employment.

136. The restraint concerned the engagement of an employee by a business wholly or partly in competition with Employsure during the employment and during the “Restraint period” of up to 12 months after termination of the employment, within the “Restraint area”. The object of the competitor restraint is to protect Employsure’s confidential information received by an employee who relevantly becomes engaged in a rival business wholly or partly in competition with Employsure’s business during the employment and during the period of up to 12 months after termination of the employment. The restraint was a Littlewoods type restraint: see [52] above.

137. That the parties expressly agreed that the competitor restraint would be triggered only if there was competition, relevantly, at the date of termination of the employment, justifies an inference that the parties contemplated when they entered into the restraint that there was a prospect that there would be businesses in competition with Employsure at the time the employment ended, whenever that might be. Employsure correctly submits that it was unnecessary for Employsure to prove that the confidential information that it was contemplated in February 2018 that Mr Kumaran would be given access to in his role, including as a result of any promotions, could potentially be used by ELMO or by any actual or contemplated competitor as at February 2018. Plainly, the parties could not then identify the specific confidential information that Mr Kumaran would receive, or when his employment would end.

138. Contrary to the appellants’ submissions, the reasonableness of the restraint is to be assessed not by reference to the particular competitor at the time the restraint is sought to be enforced, in this case ELMO, but by reference to the potential for detrimental use of Employsure’s confidential information when the restraint was agreed. So much was ultimately conceded by the appellants when acknowledging in their written reply submissions, that “it is wrong to focus on the potentiality for ELMO to use Employsure’s confidential information to its detriment”.

139. The reasonableness of the restraint at the time it was agreed does not depend on the findings as to particular information to which Mr Kumaran was exposed in his final role. Thus, to the extent that the appellants have successfully challenged the “digital marketing” and “strategies” findings at [419] (see [121] and [124] above), that is relevant to the discretion to enforce the restraint, if found reasonable. Insofar as the findings at [419] and [420] otherwise stand, those findings are relevant in illuminating what was foreseeable at the time of entry into the restraint.

140. Next, the appellants say that Mr Kumaran’s lack of seniority was a relevant consideration in assessing the reasonableness of the restraint: JMB (NSW) Pty Ltd v West [2020] NSWSC 1380 at [67]-[73]. The submission continued that the proposition that a lowly, and low paid, employee like Mr Kumaran could reasonably bargain away his liberty to use his aptitude and skill as he chose for a period of nine months is intuitively unsound. Employsure says that this characterisation of Mr Kumaran’s position is not correct, and in any event, it fails to accommodate the potential for a promotion, which is what occurred and could reasonably have been anticipated by the parties upon entry into the contract.

141. Employsure’s reliance upon Mr Kumaran’s title upon promotion to the position of “partner” in the Inbound Sales team, is somewhat a distraction. His base salary of about $76,000 remained relatively modest. Even accepting the potential for promotion, Mr Kumaran’s lack of seniority within Employsure is relevant in assessing the reasonableness of the restraint, particularly, the duration of the restraint.

Accumulated mass of knowledge not sufficient to justify the restraint

142. As to (3) above, it is not necessary to identify with precision the confidential information that justifies a competitor restraint: Emeco at [100]; Miles v Genesys Wealth Advisors at [22]-[24]. Given the unchallenged findings at [417] and [418], there was no error in finding that a restraint to protect against the misuse of Employsure’s confidential information was reasonable.

143. The critical issue in this case is the reasonableness of the duration of the restraint, to which I now turn.

Duration of the restraint

144. The essential question is whether Employsure has shown that the restraint for a duration of nine months imposed no greater restraint than is reasonably necessary for its protection: Stenhouse Australia Ltd v Phillips [1973] 2 NSWLR 691 at 697C.

145. The appellants challenge the finding that the restraint for a duration of nine months was reasonable. They say that (a) Employsure did not attempt to demonstrate that any of the information had a currency that would justify a restraint period of nine months, (b) there was no basis to be satisfied that any of the information had such a currency, (c) there is no meaningful reasoning to support the conclusion that a restraint period of nine months was reasonable, and (d) the conclusion was not open.

146. Employsure sought to uphold his Honour’s finding, pointing to two matters: first, the parties’ agreement to a 12-month restraint was an important but not conclusive factor and second, his Honour’s conclusion that a nine-month period was reasonable, having regard to the time that Employsure’s information would remain current and the information that Mr Kumaran would remember, involved a weighing exercise. The submission continued that his Honour was in a position of advantage in undertaking an evaluative assessment, and the appellants do not explain why this Court should interfere with that assessment.

147. It can be accepted that this Court must recognise the advantages enjoyed by the primary judge who conducted the trial, however, after giving full weight to his Honour’s decision (Warren v Coombes at 552), I respectfully consider that it was wrong. Accepting the importance but not conclusiveness of the parties’ consensual agreement to a restraint of up to 12 months, it is not possible to reconcile his Honour’s finding that a restraint of nine months was reasonable, with the related finding that “[g]iven his status I am of the view that much of what he may have been exposed to will have evaporated from his head”: at [422]. The force of the latter finding is simply not reflected in reading down the restraint from 12 months to nine months.

148. The finding about the loss in Mr Kumaran’s memory of much of the information to which he may have been exposed, accorded with the reality of his relatively low-level position and the nature of his duties as a business sales consultant, including in the event of a promotion to other parts of the sales team, as described at [10] and [23] above. Having regard to his limited introductory role with prospective customers, and the nature of the duties of business sales consultants within Employsure’s sales team, the parties should be taken at the time of his contract to have reasonably expected that any confidential information obtained by Mr Kumaran, including about prospective customers or the “productivity” of the sales team, would be necessarily short-lived.

149. There is a further consideration. At trial, no real attempt was made by Employsure to show why it was reasonable to contemplate at the time of the contract that any confidential information received by Mr Kumaran as a business sales consultant would remain current and of commercial advantage (Cactus at [36]) for a period of 12 months after termination of his employment, as submitted by Employsure, or for a period of nine months, as found by his Honour. His Honour gave no reasons for implicitly finding that such information would remain current for nine months. That cannot be accepted, given the nature of any confidential information to which Mr Kumaran would be exposed in his role, including the possibility of a promotion, in the business sales teams.

150. Ultimately, when pressed in this Court as to the significant disparity between the duration of the restraints found to be reasonable against Mr Kumaran and Mr McMurchy, where Mr Kumaran was at some level below Mr McMurchy, senior counsel for Employsure fairly accepted that in the circumstances of this case there was no good answer as to why a longer restraint post termination of nine months was reasonable against Mr Kumaran, when Mr McMurchy’s restraint post termination was only six months.

151. In my view, the finding that the post-employment restraint for nine months was reasonable cannot stand. Ground 1 is made out.

152. Employsure did not submit that if the restraint for nine months was found to be unreasonable, the restraint should be read down to either six or three months being the other alternative periods of the restraint provided for in the contract. Nor did it submit that if a restraint for even three months was unreasonable, it should be read down for a lesser duration under the Restraint of Trade Act 1976 (NSW), s 4(1). In these circumstances, it is unnecessary to consider any of these alternatives.

Ground 2: challenge to injunctive relief

153. Ground 2 challenges his Honour’s finding and order 3 that Mr Kumaran be restrained from being employed by ELMO for a period of nine months after the termination of the 2018 contract. Order 3 was in the following terms:

3.   The first defendant is restrained from 11 February 2021 until 10 November 2021 in Australia, from being directly or indirectly engaged, concerned or interested in any business that is wholly or partly in competition (or is preparing to be wholly or partly in competition) with the business carried out by the plaintiff.

154. Given the conclusion on ground 1, the challenge in ground 2 to the granting of an injunction against Mr Kumaran for nine months must be upheld. In the absence of any alternative submission by Employsure that a lesser duration than nine months was reasonable, and a finding to that effect on appeal, it is unnecessary to consider the re-exercise of the discretion to grant injunctive relief for a lesser period.

Conclusions

155. The appeal by Mr Kumaran and ELMO has succeeded. Orders 1, 3, 5 and 6 made by the primary judge should be set aside, and in place, the summons filed 24 February 2021 should be dismissed with costs.

156. As to costs, it was common ground that the parties should be afforded an opportunity to make submissions on the consequential costs order in this Court and below if the appellants had some success on appeal. The orders which I propose will afford the parties in the Kumaran proceedings such an opportunity.

Orders

157. Accordingly, I propose the following orders:

2021/328205 (McMurchy/ELMO appeal)

1. Grant leave to appeal.

2. The appellants to file a notice of appeal in terms of the amended draft notice of appeal in the supplementary white folder, tab 1, within seven days.

3. Appeal dismissed.

4. The appellants to pay the respondent’s costs in this Court.

2021/328225 (Kumaran/ELMO appeal)

1. Grant leave to appeal.

2. The appellants to file a notice of appeal in terms of the draft notice of appeal in the white book within seven days.

3. Appeal allowed.

4. Set aside orders 1, 3, 5 and 6 made by the primary judge on 26 October 2021 and in lieu order that the Summons filed 24 February 2021 be dismissed.

5. Reserve the question of costs in this Court.

6. If the parties do not submit consent orders as to costs in this Court and below within 14 days of the date of these orders, direct the respondent to file and serve its written submissions as to the appropriate cost orders within 21 days of the date of these orders, the appellants to file and serve their written submissions in response within a further seven days (in each case not exceeding four pages), with any reply by the respondent to be filed and served within a further seven days (not exceeding two pages), and note that the question of costs will be determined on the papers.

158. LEEMING JA: I agree with Gleeson JA.

159. KIRK JA: I agree with Gleeson JA.

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Amendments

13 October 2022 - Amend name of law firm representing the respondent.

Decision last updated: 13 October 2022