RNTT Pty Ltd v Constable - [2014] SADC 78

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
RNTT PTY LTD v CONSTABLE
[2014] SADC 78
Judgment of His Honour Judge Barrett
12 May 2014
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - IMPLIED TERMS - IMPLICATION OF MUTUAL OBLIGATION

TRADE AND COMMERCE - TRADE AND COMMERCE GENERALLY - RESTRAINT OF TRADE - RESTRAINT BY AGREEMENT - VALIDITY AND REASONABLENESS
The defendant was employed as a state manager by the plaintiff, a work recruitment company. The parties executed a Restraint Agreement that the defendant would not solicit the plaintiff's clients for 6 months following termination of his employment. While employed, during the 6 month restraint period and thereafter the defendant has worked on his own account for one, at least, of the plaintiff's clients. The plaintiff sought damages comprising monies the defendatnt received during his employment, during the restraint period and thereafter.
Held:
1) The defendant breached his implied fiduciary obligation to the plaintiff, and the reasonable terms of the Restraint Agreement respectively by working on his own account during his employment and for 6 months after termination. The defendant must account for these monies and pay damages.
2) The damages arising from the work done after the 6 months Restraint period are too remote. Damages not payable.
Concut Pty Ltd v Worrall (2000) 75 ALJR 312; Timber Engineering Co Pty Ltd v Anderson [1080] 2 NSWLR 488; JW Carter, Contract Law In Australia 6th ed 2013; Amaco Australia Pty Ltd v Rocca Brothers Motor Engineering Company Pty Ltd (1973) 133 CLR 288; Geraghty v Minter (1979) 142 CLR 177; Brightman v Lanson Paragon Ltd (1914) 18 CLR 331; Fitch v Dewes [1921] AC 158; Lindner v Murdock's Garage (1950) 83 CLR 628; A Buckle & son Pty Ltd v McAllister (1986) 4 NSWLR 426; Stewart’s Guide to Employment Law 2nd ed 2009; Smith v Nomad Modular Building [2007] WASC 169; Johnson v Perez (1988) 166 CLR 351; Hadley v Baxendale (1854) 9 EX 341; Pavey and Matthews Pty Ltd v Paul (1987) 162 CLR 221; Buckley v Tutty (1972) 125 CLR 353, considered.

RNTT PTY LTD v CONSTABLE
[2014] SADC 78

The plaintiff sues the defendant for damages arising from a breach of his employment contract. The plaintiff is a labour hire company based in Adelaide, with an office in Queensland. Between 1994 and 28 July 2011 the defendant was employed by the plaintiff as its Queensland Regional Manager. The plaintiff alleges that while employed by the plaintiff, in contravention of his employment contract, the defendant undertook labour hire work for the plaintiff’s clients but on his own account. While employed by the plaintiff he received income for himself by servicing the plaintiff’s clients. The plaintiff seeks damages, first, for the monies received by the defendant from the plaintiff’s clients during his employment by the plaintiff.
Second, the plaintiff seeks damages comprising income received by the defendant from the plaintiff’s clients for 6 months after he ceased employment. The plaintiff asserts that in an agreement signed in August 2008 (14 years after the original employment agreement in 1994) the defendant agreed not to undertake labour hire work for 6 months after the termination of employment. The plaintiff asserts that in the 6 months after the termination of the employment agreement on 28 June 2011, the defendant continued to service the plaintiff’s clients for his own benefit.
Third, the plaintiff seeks damages from the defendant comprising income he received from the plaintiff’s clients after the expiry of the 6 months from the termination of his employment. The plaintiff asserts that such income is in effect the “fruit of the poison tree”. The plaintiff asserts that the defendant is accountable to it for all income earned from the plaintiff’s clients from when he was employed by it until the present.
The plaintiff alleges that the defendant has serviced two clearly identified clients, Inghams Enterprises Pty Ltd (Inghams) and Desiree Management Pty Ltd (Desiree), and other less clearly identified clients.
For his part the defendant admits that while employed by the plaintiff, and up to the present, he has serviced Inghams on his own account. His defence is that his employment contract unreasonably sought to restrict him working for Inghams on his own account, both while he was employed by the plaintiff and for the 6 months after termination. His defence to the claim for recovery after the expiration of the 6 months is effectively that that claim is too remote. The defendant was unrepresented at trial.
The defendant denies that he has ever worked on his own account for Desiree, or any other of the plaintiff’s clients. He admits working for Inghams alone.
The plaintiff has been unable to ascertain precisely the income it claims the defendant has received from its clients. There has been no order of the court for the defendant to account to the plaintiff for such income. The defendant’s disclosure of income is incomplete. Accordingly I determined during the trial that I would sever the questions of liability and quantum of damages. In this judgment I will determine the extent, if any, of the defendant’s liability to the plaintiff. If I find him liable, I will make orders for account and will separately determine the damages payable.
The Issues at this Trial
1)Was the defendant in breach of his contract of employment in servicing on his own account the plaintiff’s clients while he was employed by the plaintiff?
2)If so, what clients did he service?
3)Was the defendant in breach of his contract of employment in servicing on his own account the plaintiff’s clients in the 6 months after his employment was terminated?
4)If so, what clients did he service?
5)Is the plaintiff entitled to recover damages for the defendant’s servicing on his own account the plaintiff’s clients after the 6 months had expired?
6)If so, what clients did he service?
Discussion
Work during employment
From 1994 until 28 June 2011 the defendant was employed by the plaintiff as its Manager for Queensland. The written Employment Agreement is dated 6 December 1994.[1] There was executed by the plaintiff and the defendant on the same day what is effectively a confidentiality agreement.[2] No further employment agreement appears to have been executed by the parties but on 15 August 2008 a more detailed Confidentiality and Restraint Agreement (“Restraint Agreement”) was signed.[3]
[1]    Exhibit P1, annexure JB1, Tender Book I pp 28-29.
[2]    Exhibit P2, annexure JB1, Tender Book pp 30-32.
[3]    Exhibit P2, annexure JB1, Tender Book pp 33-35.
By 2010 the defendant’s salary was over $100,000. His tax return for 200910 shows his salary for that year as $104,121. In addition he received a car allowance of a further $17,450.[4] His salary for the following financial year was just short of $107,500.[5] It appears the car allowance may have increased to $18,850.
[4] Exhibit D19.
[5] Exhibit P3.
The plaintiff’s Queensland office, where the defendant originally worked, was at Ipswich Road Burand but the office moved to Upper Mt Gravatt.
The defendant was off work sick on the 20 and 21 July 2011. During that time it came to the plaintiff’s attention that clients who were not being invoiced by the plaintiff were making inquiries of the defendant about work placements. The plaintiff conducted a preliminary investigation and on 27 July confronted the defendant with allegations that he was servicing some of its clients on his own account. The defendant’s employment was suspended that day. He resigned the following day.
One of the plaintiff’s clients was Inghams, a chicken processing company. Although some 90 per cent of the plaintiff’s work was for Brisbane City Council, Inghams was not an insignificant part of the remaining 10 per cent. Invoices from July 2004 to October 2011 show that the receipts from Inghams ranged from $40,000 in 2009 to over $900,000 in 2006-07. In 2010-11 the invoices totalled some $277,000.
The defendant acknowledged that in late 2010, while still employed by the plaintiff, he set up a recruiting agency of his own called Sandross.[6] The profile of Sandross describes the business as a “small recruitment business delivering big cost saving recruitment ideas to business”. The profile went on “If you want to save thousands of dollars recruiting factory or field staff then you need to discuss with me (sic)”.
[6] See profile Exhibit P7.
The address given in the profile for Sandross is the same address where the plaintiff was originally located. The defendant explained that he knew the owner of the building and when the plaintiff moved out of the premises he took over the occupancy. He said the friend let him use the office free of charge[7] for Sandross. In 2010 he set up a trust for Sandross.[8] He “believed” that the tax returns for the Constable Family Discretionary Trust for 2011-13 were the returns for the income derived by Sandross.[9] The net taxable income for those 3 years was as follows:
2011              $8,462
2012              $60,698
2013              $64,028
[7]    T108.
[8]    T124.
[9]    T124.
The defendant agreed that he was charging Inghams 10 per cent less per client than the plaintiff had charged because he was not charging Inghams GST. He said he was not registered for GST.[10]
[10] T114.
The defendant said the work he did for Inghams was generating a major part of his present income.[11]
[11] T117.
The defendant says that, although he set up Sandross in late 2010, he did not start doing recruitment business for Inghams on his own account until February 2011. The defendant explained that he felt justified in working for Inghams on his own account while still employed by the plaintiff on a number of bases, as follows:
·His employment agreement was too restrictive[12]
·Inghams were free to deal with anyone they wanted[13]
·The plaintiff did not chase up Inghams, so he did[14]
[12] T83.
[13] T84 and T97.
[14] T99.
After the defendant resigned, the plaintiff sought to regain Inghams work but they were told that the defendant was now doing Inghams work.
The defendant denies servicing any other of the plaintiff’s clients while employed by the plaintiff. I will return to that question shortly. For the present I will make findings in respect of the defendant’s admitted work for Inghams on his own account while still employed by the plaintiff.
In my view the defendant’s claim to be entitled to work for the plaintiff’s client, Inghams, while still employed by the plaintiff is completely untenable. While Inghams may, as the defendant asserts, be free to engage anyone they choose to do their work, the defendant was not free to do that work on his own account when employed by the plaintiff. It is a fundamental condition implied in the contract of employment that the employee will not derive income for himself from the employer’s clients. The defendant does not dispute that he was doing Inghams work using his employer’s resources. While he might have some of the work at home out of office hours, work was also done in the plaintiff’s office using the plaintiff’s resources. All the while the defendant was receiving from the plaintiff a salary in excess of $100,000 plus a car allowance.
As the High Court has confirmed “the relationship between employer and employee is one of the accepted fiduciary relations”.[15] A critical feature of that relationship on the part of the employee is that the employee agrees to act in the interests of the employer. In fact the obligation is mutual. In Concut v Worrall (supra) the High Court noted a relevant illustration of the fiduciary obligation. In Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488 the court found employees had breached their fiduciary duties by diverting the business and profits of their employer to themselves. I find that that is effectively what the defendant has done in this case. Instead of invoicing the plaintiff’s client Inghams for the benefit of his employer he has invoiced them for his own benefit. It does not matter that there is no express term in his contract of employment requiring him to act in good faith. The requirement to so act is fundamental to the relationship of employer and employee. It was his fiduciary duty to act in good faith towards the plaintiff.
[15] Concut Pty Ltd v Worrall (2000) 75 ALJR 312 at [17].
I find that in so doing the defendant was in breach of his contract of employment with the plaintiff. He must account to the plaintiff for the monies he received from Inghams during his employment. He must pay those monies to the plaintiff as damages.
Clients other than Inghams
The plaintiff alleges that the defendant was also servicing their client Desiree on his own account. The plaintiff’s last invoice to Desiree was dated 6 December 2010. Notwithstanding that, the plaintiff has produced emails passing between the defendant and a Ms Johnson (Desiree) which indicates that both before and after 6 December 2010 the defendant was doing recruiting work for Desiree. The emails are on the defendant’s home computer. It is unclear whether the emails before the plaintiff’s last invoice dated 6 December 2010 were for work invoiced by the plaintiff or whether they were for work done by the defendant on his own account. Suffice to say the emails after 6 December 2010 would appear to relate to work done by the defendant for which the plaintiff rendered no invoice. There are emails apparently dealing with recruitment for Desiree in January 2011[16] and March 2011.[17] For example, the last email on 24 March 2011 from Ms Johnson to the defendant says:[18]
Ross
I need another fridgie for Capella
Same as prev. Details for last job adv
Can you do up a new adv. on seek for me please? (sic)
Thanks
Des
[16] pp 106.
[17] pp 107-111.
[18] pp 111.
The defendant repeatedly denied doing any work for Desiree on his own account, but his denials were at times discursive and unconvincing.[19]
[19] See T76-78.
The defendant sought to tender what he said were statutory declarations by “Desiree Management” denying that the defendant had done any work for them on his own account. I upheld Mr Richter’s objection to the tender of those documents when it appeared that the defendant did not propose calling any witness from Desiree.
I pause to make findings regarding the defendant’s credit.
I do not accept that the defendant is a credible witness. I explain why. The defendant was frequently extremely discursive, and I find, evasive. His answers to questions about the work for Desiree are a good example.[20] Another example was his unwillingness to give a straight answer on the topic of his working hours when employed by the plaintiff.[21]
[20] See T76-8.
[21] See T109-114.
The topic of the defendant’s working hours is relevant to the purpose of his communicating with clients on his home computer at what might be thought to be out of work hours. The suggestion by the plaintiff is that the defendant was using his own computer to hide his working on his own account. Some emails on the home computer were out of hours but others were within what might be regarded as office hours, suggesting that the defendant was not just using the home computer at home after hours. He communicated with Desiree, for example, on the home computer at all hours, suggesting that the home computer was being used at all times to hide the communications from the plaintiff. I think the defendant was perfectly conscious of the point of questions on that topic, and for that reason he obfuscated at length on the topic of his working hours.
Another example of evasion on the defendant’s part relates to questions about his finances. He produced some of his bank statements. He said that the bank accounts referred to in those statements were his only accounts. However he could offer no explanation for transfers in Exhibit D17 on 21 November 2010 and Exhibit D18 on 21 December 2010 referring to another account.[22] He sought to distance himself from the entity receiving the income in the Constable Trust tax returns. He “believed” it related to Sandross.
[22] T119.
I do not accept the defendant’s evidence except where it is supported by other reliable evidence.
Specifically I do not accept the defendant’s denials that he worked for Desiree on his own account while employed by the plaintiff. I find that he did. I will order that the defendant account to the plaintiff for that work.
The plaintiff asserts that in addition to the work the defendant was doing for Inghams and Desiree in his own account the defendant also appeared to do some work associated with the Brisbane City Council, the plaintiff’s largest client. However the only evidence pointing to the possibilities of such work is evidence of emails mentioning three names which do not appear on the plaintiff’s computer system of work. Those names are Glenn & Braydon Pearce and Marion Vincent. They appear on the defendant’s home computer. I am unable to be satisfied that such work was being done by the defendant on his own account. I found his denials on that topic[23] discursive and unconvincing but that is not sufficient to make out the plaintiff’s case in relation to that claim.
[23] T80-82.
Findings on First Issue in Trial
I find that during the time the defendant was employed by the plaintiff he did recruitment work on his own account for the plaintiff’s clients Inghams and Desiree. He was paid by those clients for that work. He did that work in breach of his contract of employment. He is liable to pay in damages to the plaintiff the monies he received from those clients while employed by the plaintiff.
Third Issue in Trial
I turn to the question of whether the plaintiff is entitled to recover from the defendant any monies he received from the plaintiff’s clients in the six months after his employment was terminated. That question depends upon the enforceability of the restraint of trade provisions in the Confidentiality and Restraint Agreement executed by the parties on 15 August 2008.[24] The agreement provides that the defendant will not engage in “Restricted Activities”. Those activities effectively preclude the defendant from working for the plaintiff’s clients for a period of 6 months from the termination of employment.
[24] Exhibit P1, Tender Book Volume I pp 33-35.
It is not disputed by the defendant that ever since the termination of his employment on 28 July 2011 he has continued to work for Inghams. The defendant denies ever working for Desiree on his own account. I have found that he did work for Desiree on his own account when employed by the plaintiff, but it is less clear whether he did so after he terminated his employment. I will reserve that question for further determination after the defendant has accounted to the plaintiff for work he did on his own account.
For the present I will simply decide the question of the enforceability of the restrictive agreement.
A term in a contract which is in restraint of trade will be contrary to public policy and void if it is unreasonable.[25]
[25] Amaco Australia Pty Ltd v Rocca Brothers Motor Engineering Company Pty Ltd (1973) 133 CLR 288 at 307.
The plaintiff bears the burden of establishing that the restraint is reasonable.26
26 Buckley v Tutty (1872) 125 CLR 353 at 377.
Further, courts take a less favourable view of restraint clauses in contracts of employment.[26] That is because such a restraint is thought to have a greater impact in the employment context and because of the perceived superior bargaining position of employers.
[26] Geraghty v Minter (1979) 142 CLR 177 at 185.

Nevertheless restraint clauses affecting former employees may be found to be reasonable and enforceable. Citing the High Court, Privy Council and New South Wales authority[27] the author of JW Carter, Contract Law in Australia (6^th ed, 2013) at p 587 suggests that the approach to determining the reasonableness of a restraint is as follows:
First, the properly protectable interests of the employer must be identified. The nature and geographical spread of the employer’s operations, the location of clients and the goodwill of the business, are relevant.
Second, the status, functions and duties of the particular employee must be determined. The degree of contact between the particular employee and the clients, the level of seniority and responsibility within the structure of the employer’s operations and possession of (or access to) trade secrets and confidential information belonging to the employer are all relevant factors.
Third, a decision must be made as to whether, in the light of these matters, the particular restraint imposed goes no further than to safeguard the employer’s protectable interest.
[27] Brightman v Lanson Paragon Ltd (1914) 18 CLR 331, Fitch v Dewes [1921] AC 158, Lindner v Murdock’s Garage (1950) 83 CLR 628, A Buckle & Son Pty Ltd v McAllister (1986) 4 NSWLR 426.
Applying that approach I make these observations about the interests of the plaintiff as employer and the defendant as employee. The defendant was a long-time senior employee of the plaintiff. He had been employed for some 17 years as the State Manager for Queensland. The plaintiff had an extensive clientele in Queensland, principally, although not exclusively, in Brisbane. Clients such as Inghams were also of longstanding. The defendant was the principal contact between the plaintiff and most clients. To be reasonable, the restraint must go no further than safeguard the employer’s protectable interest. Given the clientele of the plaintiff and the position of the defendant as manager, I do not think that the extensive geographical reach of the restraint is unreasonable. Nor is it unreasonable to apply the restraint to all of the defendant’s customers and clients. That leaves the question of the 6 month term of restraint.
In a case also involving the plaintiff as employer, Costello DCJ found that 16 weeks was reasonable restraint.[28] In that case the employee was the plaintiff’s business development manager in Queensland. I take that position to be less senior than the defendant’s position. That case did not involve the employee taking the plaintiff’s clients. It involved the defendant being employed by a rival company. In his book Stewart’s Guide to Employment Law (2^nd ed, 2009) Professor Andrew Stewart cites cases which have considered the reasonableness of the duration of restraint. While I appreciate that limited weight can be attached to comparing the facts of different cases, I note that in Smith v Nomad Modular Building [2007] WASC 169 the court found reasonable a restraint of 6 months on a senior employee becoming involved with any of the employer’s competitors.
[28] RNTT Pty Ltd v Ryan [2013] SADC 35, 8 March 2013.
In my view a 6 month restraint upon someone in the defendant’s position soliciting the plaintiff’s clients is entirely reasonable. I find the terms of the Restraint Agreement entered into by the plaintiff and the defendant reasonable and enforceable.
Findings on Third Issue at Trial
I find the defendant has breached the Restraint Agreement by working for Inghams in the 6 months following the termination of his employment. He must account to the plaintiff for the monies he received from Inghams during the 6 months after 28 July 2011. He must pay those monies to the plaintiff as damages.
If it transpires that he has received monies from Desiree during that time there must be the same accounting and paying.
Fifth Issue in Trial
There remains the question of whether the defendant is liable to the plaintiff for monies received from Inghams since the expiration of the 6 months restraint period. Are such monies “the fruits of the poison tree” and therefore payable to the plaintiff?
The purpose of damages is to compensate the plaintiff for the consequences of a breach of contract rather than to penalise the breaching party.[29] The object is to place the aggrieved party in the position it would have been were it not for the breach.
[29] Johnson v Perez (1988) 166 CLR 351 at 355.
Damages must not be too remote from the breach. The damages payable must be those which occur “according to the normal course of things” or “such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it”.[30]
[30] Hadley v Baxendale (1854) 9 EX 341 at 354; 156 ER 145 at 151.
That said, the law recognises that in some cases it is unfair or unjust that a breaching party may remain enriched by his breach.[31]
[31] Pavey and Matthews Pty Ltd v Paul (1987) 162 CLR 221 per Deane J at 256-7.
In the context of unjust enrichment it might be thought unfair for someone such as the defendant to, first, supplement his income from his employer by deriving further income from his employer’s clients, then effectively subsist on that income through a reasonable period of restraint and, finally, subsist on that income indefinitely beyond that. That really is the position of the defendant.
On the other hand it is conceivable that the defendant might have legitimately obtained the work from clients such as Inghams if he had complied with the terms of his agreement. It is possible that, even if he had desisted from working for Inghams for 6 months after he left the plaintiff’s employment, he might have been able to attract their work thereafter.
It is true that the plaintiff has been deprived of Inghams’ custom by reason of the defendant’s breaches of his contract, but it is conceivable that they might have been deprived of their custom 6 months after the defendant left their employment.
In those circumstances I find that the damages sought by the plaintiff for the work done by the defendant after the 6 months restraint period is too remote. I dismiss that aspect of the plaintiff’s claim.
Findings
1)I find that the defendant has breached his contract of employment with the plaintiff by working for the clients Inghams and Desiree during the course of his employment with the plaintiff.
2)I find that the defendant is liable to pay damages to the plaintiff for the work he did for the clients Inghams and Desiree during his employment.
3)I order that the defendant account to the plaintiff for the monies received by him from Inghams and Desiree up to 28 July 2011. I will make more detailed orders for account if required. I will determine the quantum of damages once the orders for account have been complied with.
4)I find that the defendant has breached the terms of his Restraint Agreement with the plaintiff by working for Inghams in the period 28 July 2011 to 27 January 2012.
5)I find that the defendant is liable to pay damages to the plaintiff for the work he did for Inghams during the period 28 July 2011 to 27 January 2012.
6)I order that the defendant account to the plaintiff for the monies received by him from Inghams from 28 July 2011 to 27 January 2012. I will make more detailed orders for account if required. I will determine the quantum of damages once the orders for account have been complied with.
7)If it transpires after the orders for account have been complied with that the defendant has received monies from Desiree in the period 28 July 2011 to 27 January 2012 I will make further orders in respect of such monies.
8)I dismiss the plaintiff’s claim for damages for work done by the defendant for Inghams, or any other client of the plaintiff’s, after 27 January 2012.