Pearson v HRX Holdings Pty Ltd

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FEDERAL COURT OF AUSTRALIA

Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111

Citation: Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111
Appeal from: HRX Holdings Pty Ltd v Pearson [2012] FCA 161
Parties: BRENT PEARSON v HRX HOLDINGS PTY LTD and ATTORNEY GENERAL OF NEW SOUTH WALES
File number: NSD 447 of 2012
Judges: KEANE CJ, FOSTER AND GRIFFITHS JJ
Date of judgment: 17 August 2012
Catchwords: CONTRACTS – restraint of trade – enforceability of post-employment restraint at common law and under Restraints of Trade Act 1976 (NSW) – construction of restraint – “business or operation similar to or competitive with” – reasonableness of scope and duration of restraint for protection of legitimate interest – relevant factors when considering reasonableness – “human face” of the business – payment during restraint period – specific consideration given for restraint period – negotiations regarding the scope and duration of restraint – receipt of independent legal and accounting advice
Words & phrases:  “similar to or competitive with”
“human face of”
Legislation:

Jurisdiction of Courts (Cross-vesting) Act 1987 (NSW) s 5

Restraints of Trade Act 1976 (NSW) s 4

Cases cited:

Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9 cited
Butt v M’Donald (1896) 7 QLJ 68 followed
Elsley v J G Collins Insurance Agencies Limited [1978] 2 SCR 916 followed
HRX Holdings Pty Ltd v Pearson [2012] FCA 161 related
Jardin v Metcash Limited (2011) 285 ALR 677 followed
Koops Martin v Dean Reeves [2006] NSWSC 449 cited
Lindner v Murdock’s Garage (1950) 83 CLR 628 cited
Mackay v Dick (1881) 6 App Cas 251 followed
Mills v Dunham [1891] 1 Ch 576 followed
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 followed
Smith v Ryngiel [1988] 1 QdR 179 cited
Stacks Taree v Marshall [No 2] [2010] NSWSC 77 cited
Stenhouse Australia Ltd v Phillips [1974] AC 391 cited

Woolworths Ltd v Olson[2004] NSWCA 372 cited
Textbooks cited: Heydon JD, The Restraint of Trade Doctrine (3rd ed, Lexis Nexus Butterworths, 2008)
Date of hearing: 30 July 2012
Place: Sydney
Division: GENERAL DIVISION
Category: Catchwords
Number of paragraphs: 69
Counsel for the Appellant: Mr H Dixon SC with Mr N Furlan
Solicitor for the Appellant: Harmers’ Workplace Lawyers
Counsel for the First Respondent: Mr P Braham SC with Mr Y Shariff
Solicitor for the First Respondent: Clayton Utz
Counsel for the Second Respondent: Mr S Robertson
Solicitor for the Second Respondent: Mr I V Knight, Crown Solicitor

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 447 of 2012
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN:

BRENT PEARSON
Appellant
AND:

HRX HOLDINGS PTY LTD
First Respondent

ATTORNEY GENERAL OF NEW SOUTH WALES
Second Respondent

JUDGES:

KEANE CJ, FOSTER AND GRIFFITHS JJ

DATE OF ORDER:

17 AUGUST 2012

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

1.The appeal be dismissed; and

2.The appellant pay the first respondent’s costs of the appeal,…

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Details
Case
[2012] FCAFC 111
Decision Date

CaseChat Overview and Summary

The appeal in Pearson v HRX Holdings Pty Ltd was heard before the Court of Appeal, with HRX Holdings Pty Ltd as the respondent and Mr Pearson as the appellant. The dispute centred on the enforceability of a post-employment restraint clause in Mr Pearson's contract of employment with HRX, specifically whether the clause was reasonable and enforceable at common law and under the Restraints of Trade Act 1976 (NSW). The primary judge had found the clause enforceable, and Mr Pearson appealed that decision. The legal issues before the Court of Appeal included the construction of the restraint clause, the scope of the restraint, and whether the restraint was reasonable in duration and scope to protect HRX's legitimate business interests. Additionally, the Court considered whether there was specific consideration for the restraint and whether Mr Pearson had received independent legal and accounting advice regarding the clause.

The Court of Appeal found that the primary judge's construction of the restraint clause was correct. The phrase "business or operation similar to or competitive with" referred to HRX's business operations and those of potential competitors. The Court held that HRX had a legitimate interest in protecting its customer connections, which Mr Pearson, as the "human face" of HRX, had significant influence over. The Court rejected Mr Pearson's argument that the restraint was universal, agreeing with the primary judge that it was geographically limited. The Court also found that the restraint was reasonable in scope and duration, considering the nature of Mr Pearson's role and the competitive nature of the industry. Specific consideration for the restraint was evident, and Mr Pearson had received independent legal and accounting advice.

The Court of Appeal dismissed the appeal, holding that the primary judge's decision to enforce the restraint clause was correct. The Court ordered that Mr Pearson pay HRX's costs of the appeal, subject to taxation or earlier agreement. The Court emphasised that HRX had a legitimate interest in protecting its customer connections, which Mr Pearson's role had given him significant influence over. The restraint clause was deemed reasonable to protect these interests, and the primary judge's construction of the clause was upheld.

Orders

Orders of the court

1. The appeal be dismissed; and

2. The appellant pay the first respondent’s costs of the appeal, such costs to be taxed unless earlier agreed.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

To facilitate an appreciation of the arguments advanced in this Court, we will first summarise the factual background and the relevant contractual provisions. We will then refer to the primary judge’s Reasons for Judgment (Reasons) before addressing the arguments agitated in this Court. FACTUAL BACKGROUND The statement of the factual background which follows is taken largely from the findings of the primary judge at Reasons [1]-[18] and [50]-[58]. These findings of fact are not in issue on the appeal. Mr Pearson disputes the legal significance of his Honour’s findings and the sufficiency of his Honour’s legal analysis of the effect of the contractual provisions on which HRX relies to support its claim to injunctive relief. HRX was founded in January 2005 by Katrina Leslie. The trustee of Ms Leslie’s family trust, Cazo Pty Ltd (Cazo), is the major shareholder in HRX. Ms Leslie is the non-executive chair of HRX. Mr Pearson was first employed by HRX in February 2005. Both Ms Leslie and Mr Pearson were active in the establishment and direction of HRX in the human resources business. Mr Pearson first became involved in human resources in Australia in 1995, working for the firm known as Morgan & Banks. Thereafter, for a good deal of his time in the human resources industry, Mr Pearson worked for businesses associated with Mr Morgan and Mr Banks of that firm. At the present time, Mr Banks is the Chairman and Mr Morgan is a non-executive director of Talent2, a company which was established in 2003. Talent2 competes in Australia directly with HRX both generally and for particular clients and contracts. Mr Morgan and Mr Banks also have controlling interests in businesses in the United States of America. It was Mr Pearson’s proposal to take up employment at a senior level with Talent2 that prompted HRX to commence proceedings against Mr Pearson. The nature and extent of HRX’ business are important. HRX offers recruitment process outsourcing and consulting services, human resources outsourcing and recruitment technology to government and private enterprise. It develops techniques, technological systems, facilities and strategies for its clients. Mr Pearson has been an innovator in this area. He was HRX’ primary presenter to prospective clients in its endeavour to secure business. The primary judge said at Reasons [6]:… He had an intimate knowledge of client relationships, of the techniques and resources used by HRX to sell its services to clients, of the methods by which HRX serviced the contracts which it obtained, and of the strategies with which HRX might attempt to retain a client whose contract was about to expire (generally two to three years after inception). Mr Pearson accepted that he has been a key component of HRX’ success in entering and growing in the small and competitive market in Australia. During Mr Pearson’s time at HRX its policy was to follow clients into business opportunities outside Australia and New Zealand. Although HRX had tendered for work in other areas, at the time of Mr Pearson’s resignation, its only clients were in Australia and New Zealand.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

It is also, we think, relevant to acknowledge that HRX was potentially a competitor in an international market for human resources recruitment services. Given the nature of the business of human resource recruitment, there appears to be no geographic barriers to the recognition of such a market. The public interest is actually enhanced by arrangements which promote the expansion of Australian business overseas, and the engagement of Mr Pearson on terms which ensured his diligent pursuit of such business on behalf of his employer in such an arrangement.CONCLUSION AND ORDERS For these reasons, the arguments advanced by Mr Pearson should be rejected. The appeal should be dismissed. We consider that Mr Pearson should pay HRX’ costs to be taxed unless earlier agreed.

Ratio Decidendi

Legal Principle Established

HRX makes the point that the non-solicitation clause might well have been insufficient to protect its interest in preserving its customer connections against the risk of customer movement from it to Mr Pearson. Without the restraint in cl 14.4, Mr Pearson would be able to take employment in the division of Talent2 which is HRX’ direct competitor and former customers of HRX might gravitate to that division with new business. This outcome would not be prevented by the non-solicitation clause. This risk to HRX’ business of Mr Pearson’s involvement as an employee of a competitor was particularly significant given the centrality of Mr Pearson’s role as the “human face” of HRX in its dealings with customers and in the pursuit of new business.CONSIDERATION In this Court, Mr Pearson did not seek to challenge the primary judge’s construction of cl 14.4. We respectfully regard his Honour’s view as correct. In this regard, the phrase “similar to or competitive with” refers to a “business or operation” of a company in the HRX group. The “similarity” postulated by this phrase is not concerned with points of comparison other than in respect of the business operations of HRX and its putative competitor in relation to sources of demand for their services. On this view, the phrase “a business or operation similar to or competitive with the business of” HRX or its associated companies is a composite expression encompassing business operations which were either actually competitive with HRX or potentially so by reason of their similarity to HRX’ business at the time of termination of Mr Pearson’s employment. In addition to the three reasons given by the primary judge for this construction (which are set out in [32]-[34] above and with which we agree), reference might also be made in support of that construction to cl 14.1(e) of the service agreement, which contains an express reference to “the geographic nature of the restraints”. This provides further contextual support for the primary judge’s construction of cl 14.4 and his Honour’s rejection of Mr Pearson’s contention that the restraint was universal. While the drafting of the definition is not as clear as it might have been, a construction which will preserve the validity of the contract is to be preferred to one which will make it void: Mills v Dunham [1891] 1 Ch 576 at 589 - 590. HRX had an evident interest in preserving the customer connections which are the source of its income. It is well established that an employer’s customer connection is a legitimate business interest which can support a reasonable restraint of trade where the employee in question controls the employer’s customer connections (see, for example, Jardin v Metcash Limited (2011) 285 ALR 677 at [91], [95] and [97] per Meagher JA (with whom Young JA agreed) and more generally Heydon JD, The Restraint of Trade Doctrine (3rd ed, Lexis Nexus Butterworths, 2008) p 121-129). In Elsley v J.G. Collins Insurance Agencies Limited [1978] 2 SCR 916 at 925-928, Dickson J delivering the judgment in the Supreme Court of Canada of Laskin CJ, Martland, Ritchie, Pigeon, Beetz, Pratte JJ and himself said in a passage which, though lengthy, deserves citation in full:…Whether a restriction is reasonably required for the protection of the covenantee can only be decided by considering the nature of the covenantee’s business and the nature and character of the employment. Admittedly, an employer could not have a proprietary interest in people who were not actual or potential customers. Nevertheless, in exceptional cases, of which I think this is one, the nature of the employment may justify a covenant prohibiting an employee not only from soliciting customers, but also from establishing his own business or working for others so as to be likely to appropriate the employer’s trade connection through his acquaintance with the employer’s customers. This may indeed be the only effective covenant to protect the proprietary interest of the employer. A simple non-solicitation clause would not suffice.There are cases which uphold the validity of a covenant prohibiting an employee from engaging in a particular type of work within a specified area, and for an acceptable period of time after the termination of his employment: see e.g. Fitch v. Dewes [1921] 2 AC 158; Marion White v. Francis [1972] 1 WLR 1423; P.C.O. Services Ltd. v. Rumleski [1963] 2 OR 62; Campbell, Imrie and Shankland v. Park [1954] 2 DLR 170. In each of these cases the employee was in a position where he acquired a close personal acquaintance with the clients or customers of the business. Such a restrictive covenant was reasonable, in the words of Lord Birkenhead in Fitch v. Dewes [1921] 2 AC 158 at p. 165, in order that the employee “should not be in a position to use the intimacies and knowledge which he had acquired in the course of his employment in order to create a practice of his own in that same place and by doing so undermine the business and the connection of the [employer].” In the present case, when the clause was drafted it was known that Elsley had, or would acquire, a special and intimate knowledge of the customers of his prospective employer and the means of influence over them.In the leading case of Morris v. Saxelby [1916] 1 AC 688 Lord Parker enunciated with clarity the circumstances in which a covenant taken by an employer from an employee or apprentice will be enforceable. He said, at p. 709:Wherever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilize information confidentially obtained.It is difficult to envisage a factual situation in which an employee would be in a better position than that of Elsley in the present case, to obtain “personal knowledge of and influence over the customers of his employer.” Later in his speech, Lord Parker made the point that it is of importance: whether “the defendant ever came into personal contact with the plaintiff’s customers.” The same point is made in the following passage from Cheshire & Fifoot, The Law of Contract (8th ed.), at p. 369:A restraint is not valid unless the nature of employment is such that customers will either learn to rely upon the skill or judgment of the servant or will deal with him directly and personally to the virtual exclusion of the master, with the result that he will probably gain their custom if he sets up business on his own account.In the view which I take of this case a covenant against solicitation would not have been adequate to protect the proprietary interest entitled to protection … Elsley testified that he did not solicit former clients; notwithstanding, two hundred clients switched their custom to him. That is a vivid illustration of what Lord Parker had in mind in speaking of the influence of an employee over the customers of his employer … As Salter J. said in the case of Putsman v. Taylor [1927] 1 SCR 319 at p. 642, a covenant against solicitation “is difficult to enforce; it is difficult to show breach and difficult to frame an injunction.” The difficulty is demonstrated in this case. Does an advertisement which comes to the attention of former clients amount to solicitation? Was there solicitation by Elsley? I need not attempt to answer those questions. The point is that a non-solicitation covenant, in the circumstances here found, would have been meaningless.