Two Lands Services Pty Ltd v Cave

[2000] NSWSC 14

CITATION:	Two Lands Services Pty Limited & 1 Ors v Gregory Robert Cave [2000] NSWSC 14
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 3148/99
HEARING DATE(S):	07/10/1999
JUDGMENT DATE:	10 February 2000
PARTIES :	Two Lands Services Pty Limited (ACN 068 592 941) (First Plaintiff) Two Lands Group Pty Limited ACN 073 252 061 (Second Plaintiff) Gregory Robert Cave (Defendant)
JUDGMENT OF:	Santow J

COUNSEL :	S J Burchett (Plaintiffs) R W Tregenza (Defendant)
SOLICITORS:	McCabes Laywers (Plaintiffs) Williams - The Law Firm (Defendant)
CATCHWORDS:	TRADE — Residual Matters — Restraint of trade by Agreement — Mortgage origination business involving cultivation of "referrers" of business with long lead-time to referred business — Reasonableness of constraint on post-employment contact with referrers and clients for twelve months — Reasonableness of constraint on working for similar business in New South Wales — Other constraints — Effect of s4 of the Restraints of Trade Act 1976 (NSW) directed to actual not imaginary breaches — Principles of construction — Constraint on contacting specified banks and insurance companies unreasonable — List of referrers and their ratings not a trade secret but entitled to protection under contractual stipulation — Relief requires election between damages or an account of profits — Necessary degree of fiduciary fault for latter.
LEGISLATION CITED:	Restraints of Trade Act 1976 (NSW) s4
CASES CITED:	A Buckle & Son Pty Ltd v McAllister (1986) 4 NSWLR 426 Canadian Aero Service Ltd v O’Malley (1973) 40 DLR(3d) 371 Daly Smith Corporation (Australia) Pty Ltd v Cray Personnel Pty Ltd (Young J, NSWSC, 14 April 1997, unreported) K A & C Pty Limited v Ward (1998) 45 NSWLR 702 Lever v Godwin (1887) 36 ChD 1 Orton v Melman [1981] 1 NSWLR 583 Sherk v Horwitz [1972] 2 AR 451 SSC & B: Lintas NZ Ltd v Murphy (1986) 3 NZCLC 99 Wright v Gasweld Pty Limited (1991) 22 NSWLR 317
DECISION:	Restraint upheld and enforced.

IN THE SUPREME COURT
OF NEW SOUTH WALES
IN EQUITY

SANTOW J

No. 3148/99
TWO LANDS SERVICES PTY LIMITED ACN 068 592 941
First Plaintiff

TWO LANDS GROUP PTY LIMITED ACN 073 252 061
Second Plaintiff

GREGORY ROBERT CAVE
Defendant
JUDGMENT

10 February 2000

Table of Contents

Page

INTRODUCTION — THE ISSUES
SALIENT FACTS
RESOLUTION OF LEGAL ISSUES
Question 1 — Construction of relevant restraint
The list of referrers and their rating
Contacting referrers
Contact with former clients
Constraint on entering competing business
Constraints on contracts etc with any specified bank or insurance company
General Constraint
Question 2 — Validity
Referrer restraint and validity
Client restraint and validity
Constraint on dealing with any other person — validity
Constraint on dealing with previous bank or insurance company — validity
Constraint on employment or retainer — validity
Question 3 — Relief

ORDERS AND COSTS

INTRODUCTION — THE ISSUES

1 The Defendant employee resists the Plaintiffs’ attempt to enforce competitive restraints against the Defendant under a contract of employment dated 6 July 1998 (“the contract”). The contract is between the Defendant, Gregory Robert Cave, and the Second Plaintiff employer, Two Lands Group Pty Limited. It employed him as a “finance consultant” in a mortgage origination business which relied heavily upon an identified group of individual accountants as “referrers” of business. These proceedings follow termination of the Defendant’s employment with Two Lands Group and commencement of his current employment with an organisation known as “the Mortgage Professionals”, which I am satisfied carries on a similar, competing business to the Plaintiffs. 2 The Defendant resists enforcement contending first that the relevant restraints as a matter of construction do not apply to his conduct properly understood, second, that certain of those provisions are void for uncertainty and finally that all are invalid as unreasonable restraints of trade against public policy, applying s4 of the Restraints of Trade Act 1976 (NSW). 3 As to relief, Two Lands Services Pty Limited (“the First Plaintiff”) is a wholly owned subsidiary of Two Lands Group Pty Limited. In reliance on the contract, it seeks damages, and/or an account of profits made particularly from use of the Plaintiffs’ list of referrers and to restrain the Defendant, until 6 May 2000 from

“(a) continuing in his employment or retainer by, or soliciting business for or promoting Mortgage Professionals; and

(b) soliciting business from, or conducting business with:


(i) any referrers of clients of the Plaintiffs;

(ii) any clients of the plaintiffs;

(iii) any person with whom he or the Plaintiffs dealt with in the course of his employment;

(iv) any bank or insurance company with whom he or the Plaintiffs dealt in the course of his employment.”

The Defendant contends that the factual basis for any such relief has not been made out, as well as relying on the earlier described defences.

SALIENT FACTS

4    Philip Edward Pomfret is a Director of Two Lands Services Pty Limited, Two Lands Developing Pty Ltd and Two Lands Group Pty Limited. 5    Julio Labraga is also a director of Two Lands Services Pty Limited and Two Lands Group Pty Limited. 6    Two Lands Services Pty Limited is a company engaged in mortgage financing and in particular mortgage origination whereby mortgage business is placed with lenders; see 16 and 17 below. Two Lands Services Pty Limited is a wholly owned subsidiary of Two Lands Group Pty Limited. 7    Two Lands Developing Pty Limited is a property development company. Two Lands Developing is also a subsidiary of Two Lands Group Pty Limited. 8    Two Lands Property Pty Limited carries out property consultancy activities and is a subsidiary of Two Lands Group Pty Limited. 9    Two Lands Group Pty Limited ("Two Lands Group") as the holding company employs all employees of the subsidiaries. The employees make their services available to the relevant subsidiaries as required. 10    The Defendant Greg Cave had been originally a client of Two Lands Property Pty Limited and purchased properties in the Western Suburbs of Sydney for investment purposes since 1996. By mid-1998 he agreed to become employed in the First Plaintiff’s mortgage origination business, formally commencing employment under the contract by 6 July 1998. 11    Earlier on 25 March 1998 the Defendant told the Plaintiffs’ director Philip Pomfret of his desire to enter the mortgage lending industry. The Defendant asked Pomfret if he could work at Two Lands Services Pty Limited. 12    It should be noted that as of May 1998 the Defendant’s subsequent employer, the Mortgage Professionals had started in business. 13    After some discussions, in which I am satisfied Mr Pomfret advised the Defendant of the need to sign an agreement to prevent his use of the Plaintiff as a training ground to compete, the Defendant was retained. He started work with Two Lands Services around 6 July 1998. 14    On 6 July 1998 the Defendant signed the contract, comprising confidentiality and restriction of trade provisions with Two Lands Group Pty Limited. He was initially to be paid commission only and was to be on six months’ probation. 15    The contract included terms relevantly as follows:

“4. Confidentiality
4.1 The Employee agrees that except as authorised by the Company or as required by law he shall at all times keep secret and shall not at any time during the term hereof or thereafter use for his own or another’s advantage or reveal to any person any of the trade or business secrets or information relating to the affairs and practices of the Company which the Employee knows or ought reasonably to know to be confidential and the Employee shall take or cause to be taken such reasonable precautions as may be necessary to maintain such secretary [sic] and confidentiality and prevent such disclosure.
4.2 The employee agrees not to contact nor conduct business with any referrers of clients of the Company or any clients of the Company either directly or indirectly for a period of at least twelve months from the date of termination of employment of the employee of the Company, without consent of the directors of the Company in writing.
4.3 All such information and other documents and materials made available to or made by the employee in connection with the performance of his duties herein shall be and at all times remain the property of the Company and copyrights in any document or other material prepared by the Employee for the Company pursuant to this Agreement shall be and remain the property of the company and the Employee hereby assigns the same to the Company.
4.4 Upon termination of this agreement for any reason the Employee shall forthwith deliver to the Company all documents materials and records which are then in his possession or control relating to the business carried on by the Company or its subsidiaries and no copies thereof shall be retained by the Employee.
5. Restrictions on Employee Competing
5.1 The employee expressly acknowledges and agrees that the restrictions herein undertaken by him are fair and reasonable having regard to the nature of the Business, the information acquired by the Employee during his employment and the field of activities of the Employee, and necessary to protect the goodwill and the Business of the Company and that the Company has agreed to employ the Employee on the terms and conditions provided herein in consideration of the restrictions undertaken in this clause. The parties acknowledge that:-
(a) The company has invested substantial capital and time in obtaining extensive contact with Banks, Insurance Companies and funds providers including (without limitation) Bank West, ANZ, Bank of Melbourne, Australian Mortgage Securities, Westpac, FAI Life and Zurich Australia;
(b) There are very few companies providing the combination of loan and risk products with similar funding packages and services within New South Wales; and
(c) The Company could suffer substantial damage if the Employee worked for a competitor in New South Wales after termination of his employment with the Company or if the Employee were himself to conduct a business in competition with that of the Company.
5.2 The employee agrees and covenants in favour of the Company that:-
(a) During the currency of this agreement and for a period of twelve months after the expiry or termination thereof for any reason he will not directly or indirectly and whether jointly with or on behalf of any person in any capacity whatsoever whether as promoter, shareholder, director, secretary, sole trader, partner, joint venturer, independent contractor, sponsor, lender, supplier, licensor, licensee, owner, consultant, manager, agent or otherwise carry on, operate or be engaged or interested or employed in any business which carries on a business similar or related to the Business or any part thereof or any other business carried on by the Company within one year prior to expiry or termination of this Agreement within New South Wales or for any subsidiary or related company of a company carrying on such business; and further that:-
(b) He shall not during the same period and within the same area procure or attempt to procure orders, contracts for or promote any person who carries on a business similar to or related to the said Business carried on by the Company or solicit, canvass or procure or attempt to solicit, canvass or procure for himself or for any other person whatsoever, any order, contracts, requests for services or business from any person with whom he or the Company has dealt in the course of his employment pursuant to the terms of this Agreement. Further the Employee shall refer any such order contract, and requests for services or business to the Employer and shall not thereafter maintain any communication with such person.
(c) He shall not during the same period and within the same area enter into orders, contracts, requests, business or the provision of services with or from any of the Banks or Insurance Companies with whom he or the Company has dealt in the course of his employment including (without limitation) Bank West, Wsetapc [sic], Australian Mortgage Securities, ANZ , Bank of Melbourne, FAI Life and Zurich Australia.”
There is a general severance provision severing “provisions of this Agreement” in clause 7.2. It is not drafted in the conventional mode as a series of concentric circles progressively widening the restraints by reference to their geographic area and duration.

16    In that month (July 1998), the First Plaintiff (Two Land Services) had commenced its own mortgage origination lending program. Its business was to provide or procure residential finance through a system its director Mr Labraga called securitisation. The Company’s main financial backer was, and is, ABN Amro, through a securitisation company called AMS. Through AMS, the First Plaintiff provide residential mortgages for borrowers. 17    The business was described by the Defendant, Mr Cave, (see his affidavit of 22 July 1999, paras 9 and following) as follows:

“where the mortgage originator endeavours to arrange the lending of monies which are secured by mortgages. The borrowers are obtained by “referrers” of business, such as accountants or solicitors who may introduce to the mortgage originator one of their clients who may wish to borrow funds on the basis of a mortgage security. The funds are then directed from the lender to the borrower with the mortgage originator acting as the intermediary and receiving a portion of the interest rate charged. In recent years, mortgage originators are commonplace and established mortgage originators in the market include “Aussie Home Loans”, “RAMS”, “Wizard”, “Mortgage Choice”, “Quick Start Home Loans”, “Residential Housing”, and “Fairchilds.”

18    When the First Plaintiff commenced its own mortgage origination lending programme in approximately July 1998, having then started its involvement with ABN Amro, it transacted that business almost entirely on a referral basis. Most of the First Plaintiff’s referrals came through accountants or professionals such as solicitors. These referrers referred business to the First Plaintiff, which became responsible for the client so referred thereafter; see affidavit of Mr Labraga of 8 July 1999, paras 7 to 10. 19    The business thus started with Mr Cave’s appointment. There were only two finance consultants, Mr Cave being one. He can be taken thereafter to have been involved with most if not all the Plaintiffs’ referrers and clients. 20    Mr Cave confirms in his evidence that during the whole of the period of his employment with the Plaintiffs the only lender from whom the Plaintiffs’ obtained finance was AMS. 21    Mr Cave’s evidence on the nature of the business is consistent with the picture of the nature of the business as described by Mr Labraga. 22    Similarly consistent, is the description of the tasks required of the Defendant as “Finance Consultant”. Essentially, the Company worked by a system whereby the finance consultant “cold calls” accountants and other potential referrers identified through the yellow pages; a cold calling script prepared by the Plaintiffs is utilised. When a meeting has been arranged, the consultant then goes through the Company’s products and services using an overhead presentation developed by the Company. The referrer obtains a referral fee on what is described as a trailer commission or an up-front fee. 23    Mr Labraga explains the importance of the relationship with the referrers in para 9 of Mr Labraga’s affidavit of 8 July 1999. I quote:

“It is essential from the Company’s business point of view that having developed a relationship with a referrer the Company is able to maintain that relationship and ensure business continues to flow from that referrer. This is because the Company has chosen not to mass market or advertise and referrals are the only significance source of business for the company. The Company has taken the view that it will spend time and in fact incur losses in developing a referral network that way so that having developed that network it will get an ongoing source of business from the referral network to offset its costs.”

24    Mr Labraga then emphasised that, “The Company spends a large amount of time training the Finance Consultants. This training involves using set systems and presentations to engage and develop the relationships with the referrer through a number of stages.” See Mr Labraga’s affidavit of 8 July 1999, para 9. 25    While Mr Cave did not accept that his training was all that extensive, there is no major difference between Mr Labraga’s description and Mr Cave’s on that score and I accept that the First Plaintiff did expend time and effort on training Mr Cave. I note that his initial training took approximately two weeks and culminated in an examination which Mr Cave completed; see Mr Labraga’s affidavit of 8 July 1999, paras 11 and following. 26    In addition, the First Plaintiff kept a list in which were graded its referrers from A to D, with the A referrers being those that had the greatest potential to send business, gradated down to the D referrers who are consider generally unlikely to refer work. Mr Labraga gave evidence, which I accept, that “A lot of the A’s and B’s are ones that have already referred business during that time. From the Company’s point of view it is important that competitors not be aware of referrers who are on the A list and on the B list”. While again Mr Cave doubted the value of that information or its accuracy, I am satisfied that the list certainly had some usefulness and could fairly be said to be part of the business know-how of the Plaintiff. Significantly, Mr Labraga states that “during Greg Cave’s employment by the Company he developed a list which is (sic) approximately 150 referrers all ranked between A and D none of which he had prior to working at our firm”, see para 19 of Mr Labraga’s affidavit of 8 July 1999. The Company’s computer system recorded when the particular referrers were last spoken to and the presentations that have been made and Mr Cave would update the computer system with details of meetings with referrers. It can be seen that the combination of that information and the gradation of the list was therefore important in the successful development of the Plaintiffs’ business. It clearly would have had a value to competitors and I am satisfied that it constituted confidential information of the Plaintiffs. 27    Based on the evidence of Mr Labraga and Mr Pomfret and noting that that evidence was not effectively challenged in cross-examination, I would make the following findings:

(i) The business of the Plaintiffs was in its infancy and required significant groundwork upon which to build in the future.

(ii) The development of the business of mortgage origination via referrers and without recourse to advertising or other means made the relationship with the referrer crucial to the Plaintiffs’ business and its future success.

(iii) While building up a relationship with a referrer with consequent benefit to the Plaintiffs’ business necessarily took some time, it is clear from the evidence including the Plaintiffs’ Statement of Loans (DX1) that there was an exponential increase in business following the establishment of such relationship with referrers, which mainly fructified shortly after the Defendant left the Plaintiffs’ employment on 6 May 1999; indeed the business from the Defendant’s relationship with referrers was at the level of 30-40% of the Company’s total commissions; see paras 21 and 32 of Mr Labraga’s affidavit of 8 July 1999.

(iv) Mr Cave was in the Plaintiffs’ mortgage origination business from the outset and could fairly be taken to have had contact with most of the referrers and clients.

28    I also accept the Plaintiff’s evidence that the Defendant took from the Plaintiffs the list of referrers with whom he had dealt and built up a relationship during his employment. Thus see the Defendant’s cross-examination following his initial denial at T, 39.40 and .55. At T, 43 he acknowledged that he could not derive the fax numbers which appear on the list of referrers from the Yellow Pages whom he contacted by fax after his employment terminated, leading irresistibly to the conclusion that he had such a list and used it. His initial denial did not assist his credit; he was not overall a convincing witness. 29    Thus Mr Cave attempted to argue that though he may have contacted the referrers by fax and phone but that it was merely to advise them of his new employment and because he did not want to be associated with Two Lands. However, I am satisfied that he was clearly soliciting their business under his new employment with Mortgage Professionals. He acknowledged that he was pointing out that Mortgage Professions “could offer a complete service”; see T, 44.40. He acknowledged that the faxes he sent such as the sample dated 9 May 1999 (PX4), looked at objectively, suggested that he was forced to leave Two Lands Services and join the Mortgage Professionals so that he could provide a complete service to the clients of the referrer to whom it was addressed; see T, 44.50-.55. 30    The inference is irresistible that in making these methodical contacts with each of the referrers by fax (and also by phone and in person) Mr Cave solicited their business as referrers of borrowers on mortgage; see T, 40, 43, 48, 58 and 59 and the evidence of Mr Labraga in his affidavit of 8 July 1999, paras 25, 28 and 29. 31    Nor can it be seriously disputed that the business now conducted by Mr Cave through Mortgage Professionals is other than competitive with and similar to the business of the Plaintiffs; indeed so similar that his only other contacts by way of referrers or borrowers since he started with Mortgage Professionals are “friends, acquaintances, other people I have made contact with”; see T, 60.31 to .35. 32    Furthermore, Mr Cave admitted obtaining business from the list of referrers and expects to obtain further business from the list (T, 38.48-.55) and also to obtain further business from approaches to referrers (T, 38.35-45, T, 39.3-.8 and T, 60.25). 33    While Mr Cave claimed that he did not use the gradings because he asserted they were “very subjective”, I think it unlikely that he would not have gained some material advantage from it; see T, 39.20-.29. In particular, his new employer Mortgage Professionals would have gained some competitive advantage, in learning which referrers referred business and relatively speaking how much. If one is going to attack the underpinning to a customer base, as constituted by the referrer network, then it is clearly important to know both its strengths and weak links. 34    The Defendant also entered into commercial dealings with banks or insurance companies with whom he dealt in his employment with the Plaintiffs, again in furtherance of Mortgage Professionals’ competing business with that of the Plaintiffs. Thus he has dealt commercially with at least Westpac and Bank West both during his employment with the Plaintiffs (Labraga T, 15.35, 17.52 and Mr Cave in cross-examination T, 56.28-57.18) and again subsequently. I do not accept his denials of knowledge of them during his employment. Indeed through the Plaintiffs he himself borrowed from Bank West (see cross-examination of Mr Cave T, 35.35 and 36.5) and sat a training exam with Westpac via their accreditation questionnaire; see Mr Cave’s affidavit of 22 July 1999, para 15, cross-examination of the Defendant T, 56-7. 35    The Defendant did not dispute that the agreement was intended to be long-term with significant remuneration to flow to him once the business developed; see cross-examination of the Defendant, T, 53.57-54.10, T, 60.55. Indeed there is evidence that he was remunerated beyond his immediate earnings to the Company in anticipation of that future benefit; see cross-examination of Defendant T, 61.5 and Mr Labraga’s affidavit of 8 July 1999, para 16, Mr Pomfret’s affidavit of 11 August 1999 and the Summary of Commissions Earned from Referees in DX2 referred to in T, 23-4. 36    The Plaintiffs, in their written submissions contend that “the Defendant’s exaggerated evidence of his responsibility for the establishment of the Plaintiff’s business …. only supports the need for the restraints agreed, due to the improper influence he can bring to bear on the Plaintiffs’ clients in reliance on the methods pursued and the relationships fostered during his employment.” 37    Clearly enough it was not in dispute that the Defendant initially had no experience in mortgage lending at all, and certainly not in the accountant referred mortgage origination; thus his skills in that regard were developed whilst working for the Plaintiffs. 38    Next it should be noted that the Defendant not only conceded obtaining business via one referrer at least, Mr Beck, (T, 38.50, T 47.2 and T 62.35) but there is also the evidence from Mr Labraga as to referrers lost, being some 30 to 40 (T, 24.35). It was also conceded that the Defendant took the Plaintiffs’ Standard Loan Assessment form and utilised it in his new employment with Mortgage Professionals; see T, 41.15-T, 42). That he had earlier denied taking anything with him when he left Two Land Services including documents (see T, 39.40 and T, 39.55) reinforces the impression that his evidence was not to be relied upon in the absence of independent substantiation, certainly where Mr Cave perceived that it might damage his case. 39    I agree with the Plaintiffs’ contention that the Defendant’s discovery has proven to be unreliable as a measure of the full extent of the business that he has taken from the Plaintiffs, utilising the Plaintiffs’ list and referrers; see T, 45.40-T, 47.32. 40    Finally, the Plaintiffs contend that the Defendant has solicited business from John Harrison, John Shirlaw, David Mah Chut, Vince Russo, Ashely White, Anthony Kanaris and David Williams each being referrers of clients of the Plaintiffs. The particulars contained in the Plaintiffs’ chronology in that regard were not seriously contested. I accept that contention.

RESOLUTION OF LEGAL ISSUES

41    The relevant issues are resolved by answering the following questions; they are cross-referenced to the relevant clauses of the contract earlier quoted. 42    Question 1 — Construction of relevant restraint

Do any of the alleged breaches infringe the relevant provisions of the contracts, properly construed, leaving aside questions of enforceability or validity, insofar as the particular conduct relied upon pertains to:

(i) failing to keep secret, allegedly confidential information consisting of or derived from the list of referrers gradated according to the level of their referrals (cl 4.1 and cl 4.3);

(ii) any referrers of mortgage origination business to the Plaintiff and the referrer restraint (cl 4.2);

(iii) dealings with any clients of the Plaintiff (cl 4.2)

(iv) dealings with any person dealt with in the course of the Plaintiffs’ employment (see above);

(v) any bank or insurance company dealt with in the course of the Plaintiffs’ employment (cl 5.2(c);

(vi) entering into orders, contracts, requests, business or the provision of services with or from any bank or insurance company dealt with in the course of the Plaintiffs’ employment (cl 5.2(c));

(vii) being in employment or retainer with the new employer in a competing business with the Plaintiff (cl 5.2(a)), or promoting such new employer (cl 5.2(b))?

43    Question 2 — Validity

If the answer is yes to any of the foregoing, is the relevant restraint not against public policy insofar as applicable to the relevant conduct and thus not rendered invalid by s4(1) of the Restraints of Trade Act 1976 (NSW) (“the Act”)?

44    Question 3 — Relief

If yes to question 2 in relation to any particular conduct in question, should relief be granted by way of injunction, account of profits or damages or to restrain use of confidential information by way of the list of referrers and their rating?

Question 1 — Construction of relevant restraint

The list of referrers and their rating

45    There can be little doubt that the list of referrers, with their track record of referrals and rating, was “information relating to the affairs and practices of the Company which the employee knows or ought reasonably to know to be confidential”, within the meaning of cl 4.1 of the contract. 46    Whether or not the list also constitutes a trade or business secret does not need to be determined save as it may bear on discretion when it comes to remedy. But clearly enough, the names on a list of clients, annotated to include for example specific characteristics or needs of customers, like a list with the location of specialist supplies, are a category of commercial secret. It is thus a short step to reach the same conclusion for a list of referrers of clients, whose specific characteristics and referral record to the business has been thus set out, so enhancing the business value of the list. That information would not be in the public domain, even if it were known that these were potential referrers. And it was central to the gathering of clients for these Plaintiffs, especially given their modus operandi which did not rely on advertising. Repeat business is most likely to come via the referrers. 47    Cl 4.3 makes clear that all such information “made available to or made by the employee in connection with the performance of his duties herein shall be and at all times remain the property of the Company … ”. 48    Such information insofar as embodied in “documents, materials and records which are then in [the employee’s] possession or control relating to the business carried on by the Company” must upon termination be delivered to the Company; see cl 4.4. 49    Accepting then that the referrer list with its rating of referrers based upon experience of the level of their referrals is confidential information, it is clear from cl 4.1 that it precludes not only during the term of employment but thereafter use of the list either for the employee’s own “or another’s advantage”. In particular the employee is forbidden to “reveal to any person any … information … which the Employee knows or ought reasonably to know to be confidential”. This would clearly cover the list with its appended information. 50    In the present case, instead of delivering up the referrer list and retaining no copy, he took it with him to his new employer. I am satisfied on the evidence, that such list with its gradings, would confer some material advantage upon both Mr Cave and his new employer and competitive detriment to his former employer; see 32 above. 51    Once that has been established, the principles are clear. Whether or not the relevant information amounts to a trade secret, the courts will uphold an agreement to protect information, which is understood by the parties to be sensitive to the restrainor’s business or goodwill and might be used as “springboard” by the employee to commence in competition with his own former employer, as I am satisfied was the case here; see Wright v Gasweld Pty Limited (1991) 22 NSWLR 317 at 329D-E, 337-8, 341; K A & C Pty Limited v Ward (1998) 45 NSWLR 702 at 723A & F; SSC & B: Lintas NZ Ltd v Murphy (1986) 3 NZCLC 99, 546 and Canadian Aero Service Ltd v O’Malley (1973) 40 DLR(3d) 371. 52    Wright v Gasweld Pty Limited (supra) involved the analogous situation of information as to which agents were trustworthy and which manufacturers were reliable as suppliers of the employer. This was information derived on a trial and error basis though not of the sort that would reach the level of a trade secret as such. Protection was nonetheless given to that information. Here, the identity of referrers and where they appeared in the spectrum from A to D in terms of their potential value as referrers similarly warrants the protection contractually stipulated, even if it were not a trade secret. 53    I should here contrast information as to persons who are accustomed to hire casual blue-collar labour and the contact person in their organisation. This was the subject matter of one of the relevant restraints in Daly Smith Corporation (Australia) Pty Ltd v Cray Personnel Pty Ltd (Young J, NSWSC, 14 April 1997, unreported). Protection was denied, for good reason. For this was information which could readily be obtained just by cold canvassing from the telephone book, even if it might involve some inconvenience or take a few weeks to compile. Here, the relevant information is not simply derived from the Yellow Pages, despite Mr Cave’s feeble attempt to justify his conduct in taking away the list by claiming that source, when indeed the relevant fax references could not be found in the Yellow Pages; see paras 27-29 above. Rather it is derived from painstaking recording of actual “trade” experience. That is a matter of confidentiality, centrally connected to client gathering.

Contacting referrers

54    The second category of conduct prohibits “contact” with or “conduct of business with”, “referrers of clients” or with the clients themselves, for a twelve month period; it thus requires consideration of the scope and proper construction of that restraint in cl 4.2 earlier quoted. 55    Here, the Defendant and Plaintiffs are at opposite ends of the spectrum, in construing the expression “referrers of clients of the Company” in cl 4.2. 56    The Defendant’s contention is that use of the word “referrers” in that context implies a relatively high degree of frequency by which these people refer clients to the Plaintiffs and certainly one which would not be satisfied by simply one referral. The Defendant’s contention is that the acts of referral must also be current in the sense that the relevant accountant had to be referring clients to the Plaintiffs on a regular basis, continuing to the date of termination of the contract, namely 6 May 1999 so as to be assessed at that date. 57    The Defendant then contends that as the evidence regarding Mr Beck the accountant is that he had referred only one client to the Plaintiff at some time, such evidence fell well short of satisfying such a test. Furthermore, if one accepted the Defendant’s contention that there was insufficient evidence to show that any of the other accounting firms (identified at pages 32 and 33 of Mr Labraga’s affidavit) would satisfy such a test, it necessarily followed that the Plaintiffs must fail at the threshold, insofar as the relevant restraint would not as a matter of construction have any scope for operation in this context. 58    The Plaintiffs on the other hand put a construction which would include as a referrer anyone identified during the course of the Defendant’s employment as a potential referrer of clients, whether or not any clients were in fact referred. Alternatively, the Plaintiffs submit that the term as used in cl 4.2 describes the class of persons who have referred at least one client prior to termination of the Defendant’s employment so as thereby to become a “referrer”. The plural “referrers” is simply on that submission the counterpart to the plural “clients” in the next line of cl 4.2 and refers therefore to all referrers as a class; they oppose the proposition that to qualify as a referrer there must be a plurality of references from the one referrer. 59    The Plaintiffs then seek to reduce to absurdity the Defendant’s construction by deeming the construction one in which the restriction is pegged only to persons in the act of referring a client at the date of termination. However, that is not what I understand the Defendant to contend. Rather what the Defendant contends is that at whatever date termination occurs, one asks the question in relation to each potential referrer, had the level of referrals risen to the point where that referrer could fairly be said to be a “regular” referrer. It would not matter on that test whether at the date of termination the referrer was actually in the process of referring a particular client or not. But what it would mean on the Defendant’s construction, is that an occasional referrer would not come within the embargo on contact in cl 4.2, notwithstanding that the full potential of that referrer was still being realised. 60    The construction which I would prefer is at neither extremity. I would first include as a “referrer” within cl 4.2 anyone who had, during the term of the relevant employment, actually referred a client or of whom, already cultivated, it could reasonably be expected would refer a client in the foreseeable future. This recognises that cultivation of referrers on the evidence is a long-term process which does not yield immediate results and is indeed now yielding substantial results only after the employee has left. Likewise, included in the class of those referrers within cl 4.2 would be any diverted referrer who, but for the employee’s subsequent contact from his new employment, would reasonably be expected to have referred a client or clients for the Plaintiffs’ mortgage origination business, since obviously the employee should not be able to profit by his own wrong. 61    Clearly enough those referrers in the highest category of referrer in the list should be treated as “referrers” for the purposes of cl 4.2, in the absence of evidence from the Defendant that someone in that top category was not in reality a prospective referrer, leaving aside of course the effect of any contact with the referrer by the employee or new employer post-employment. I would leave open the possibility that someone not in that top category would in reality also be likely to refer clients. I would accept that my referrer who did in fact do so, though it be after the Defendant’s departure, should be treated as within “referrers” for the purposes of cl 4.2. It follows from what I have said, that I would not draw the line at the point where the employment terminates and exclude as a referrer someone who had yet to refer any client but who subsequently did so to the Plaintiffs provided it can be shown that the referrer was originally cultivated by the Plaintiff via Mr Cave, such that a referral to the Plaintiff might reasonably have been expected, but for Mr Cave’s departure. It should be remembered that the clause itself ceases to operate after twelve months from termination of the employment, giving a natural end point to the reach of the clause. 62    In so construing cl 4.2, I have applied the rules of construction as conveniently set out in J D Heydon “The Restraint of Trade Doctrine” (Butterworths, 1999) at 104, which I quote below (abbreviating footnotes):

“(1) [T]he question of construction should be approached in the first instance without regard to the question of legality or illegality;5
(2) …the clause should be construed with reference to the object sought to be obtained;6
(3) …in a restraint of trade case the object is the protection of one of the parties against rivalry in trade …
(4) …the clause should be construed in its context and in the light of the factual matrix of the time when the agreement was made.7

5 See Moenich v Fenestre (1892) 67 LT 602 at 604 and 605; Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026 at 1039; [1977] 1 WLR 1472 at 1486.

6 Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026 at 1035; [1977] 1 WLR 1472 at 1481.

7 Prenn v Simmonds [1971] 3 All ER 237 at 239; [1971] 1 WLR 1381 at 1383. In Russo v Field [1970] 3 OR 229 a majority of the Ontario Court of Appeal thought that covenants in restraint of trade should be construed narrowly. But, as Laskin JA said at 249-50, the relevant considerations do not all point one way …..

63 I turn to each of those rules of construction in turn. As to the first, I have put to one side the question of any reading down as may be dictated by s4 of the Act so as to leave the question of validity and severance for separate consideration under question 2 below. 64    As to the second rule of construction, clearly enough the object sought to be obtained by cl 4.2, so far as referrers were concerned, was one which recognised their crucial importance to the success of the business, no less so than for example suppliers to the covenantee; compare A Buckle & Son Pty Ltd v McAllister (1986) 4 NSWLR 426 at 433. Thus, the potentiality for repeat business via a referrer may be even greater than from an existing client who has successfully obtained finance. 65 Reflecting the third rule and given the modus operandi of the Plaintiffs’ business, protection against rivalry in trade is necessarily from those who operate in a similar manner; that is, from those who use referrers rather than large scale advertising. Clearly enough, the broader construction to cl 4.2 which I favour, though not as broad as that sought to be pressed by the Plaintiffs, is needed to serve that object. 66    I have already referred to the context and factual matrix of this contract. Here we have a modus operandi which depends upon referrers and recognises the lengthy period from cultivation of the referrer to the actual referral of business. This makes a constraint upon access to referrers readily explicable. I turn now to the embargo on dealing with any clients of the Plaintiff, where the employee is similarly constrained by cl 4.2.

Contact with former clients

67    Here, there does not appear to be any difficulty of construction, though I would not here include under “client” for purposes of cl 4.2 a prospective client. In contrast to the referrer who has been extensively cultivated, with the prospective client, there is no such cultivation upon the evidence before me.

Constraint on entering competing business

68    I turn now to cl 5.2(a) and (b) in constraining employment or retainer with a new employer in a competing business (cl 5.2(a)) or promoting the new employer (cl 5.2(b)). Here, the Defendant relies on the fact that the expression in cl 5.2(a) and (b) refers in each case to “a business similar to or related to the said Business carried on by the Company”. The Defendant contends that the expression “similar or related to the Business or any part thereof” is meaningless as the extent of the similarity is not identified in the clause. He therefore argues that the clause is void for uncertainty. 69    That contention is not made out. The expression “similar or related” requires a comparison of the degree to which the two businesses compete in the same market. Clearly enough Mortgage Professionals is carrying on a similar or related business to that carried on by the Plaintiffs both in modus operandi and in pursuit of similar business. There is no need to identify the degree of similarity with any greater precision than that. Were it necessary to do so, I would include as “similar or related” any mortgage origination business whose modus operandi includes use of referrers via a concerted programme for their cultivation, whether or not accompanied by an advertising campaign and who operate generally in the same or overlapping territory. Such an interpretation is consistent with the language of the clause and negates any suggestion of uncertainty.

Constraints on contracts etc with any specified bank or insurance company

70    I turn next to the constraint on entering into orders, contracts, requests, business or the provision of services, with or from any bank or insurance company, as dealt with in cl 5.2(c). 71    Here, the evidence is clear (see para 37 above) that the Defendant did enter into commercial dealings with banks or insurance companies with whom he dealt in his employment with the Plaintiffs, being in particular Westpac and Bank West. It can also be reasonably assumed that the Defendant has dealt in the course of his employment with the Plaintiffs’ principal financier, Australian Mortgage Securities (“AMS”). Indeed the Defendant admits that the Defendant both procured and attempted to procure business for and promoted Mortgage Professionals, in relation to clause 5.2(a); see Defendant’s written submissions para 7(a). 72    It thus follows that cl 5.2(c) is made out so far as Bank West, Westpac and Australian Mortgage Securities is concerned, with the issue remaining of validity and relief.

General Constraint

73    The more general reference to a prohibition on dealing with any person dealt with in the course of employment, which I have taken from cl 1(b)(iii) of the Plaintiffs’ Amended Statement of Claim does not appear to have any counterpart in cl 4.2 or cl 5.2 as a matter of its proper construction. I would not consider so general a constraint to be covered by the contract.

Question 2 — Validity

74 In the traditional formulation of the restraint of trade doctrine, a restraint is judged for validity by whether it is against public policy. That requires consideration primarily of reasonableness as between the parties; thereafter attention turns to the broader public interest. There is nothing to suggest that s4(1) of the Act involves any different approach or test. 75    Heydon (supra) at 142, points out that there are few cases in which covenants valid as between the parties have been struck down as against the public interest. Such cases as there are have tended to be ones where, over and above the interests of the parties, the public interest would suffer if the constraint were enforced. One example is Sherk v Horwitz [1972] 2 AR 451 at 454-6 where the constraint would have denied the public access to a specialist in obstetrics and gynaecology when there was a great shortage in the area. That made hardship to the public more serious than merely a restriction on the client’s freedom of choice (contrast McLelland J’s rejection of such an independent ground of injury in Orton v Melman [1981] 1 NSWLR 583 at 588). 76 Here, it would be difficult to identify any particular element of public policy that was not already involved in determining what was reasonable as between the parties. It is to that I now turn. 77 In Daly Smith Corporation (Australia) Pty Limited v Cray Personnel Pty Ltd (supra), Young J starts with the principle, accepted by the parties, that “One must look at reasonableness of a restraint as a package including its subject matter, its area of operation and the time for which it operates.” 78    However, Young J goes on to point out that

“If one were considering the aspect of the time of the restraint separately, one would judge reasonableness by considering what needs to be imposed to protect the legitimate proprietary interest of the employer; see Stenhouse Australia Ltd v Phillips [1974] AC 391, 402; Fleming Bros (Monaro) Agencies Pty Ltd v Smith (1983) 5 ATPR 40-389 at ¶44,571. Where that interest is the employer’s customer connection, a restraint that enures after the time taken for a reasonably competent new employee to master the job and to be able to demonstrate to customers that he or she is effective and efficient, will be too long. This appears from the American cases, considered by Professor Harlan M Blake in his article, “Employee Agreements Not to Compete” in (1960) 73 Harvard Law Review 625,677.”

79 Here, the parties do differ as to both the test for validity and its application. The time constraint on contacting or conducting business with any referrers or of clients of the company is for twelve months; see cl 4.2. Similarly the constraint in relation to the various “Banks or Insurance Companies” for purposes of cl 5.2(c) is twelve months. No geographic area is stipulated in the case of contact with referrers of clients or with any clients of the Plaintiffs or for that matter with the stipulated banks or insurance companies. Whereas, when it comes to the overall restraint on competition, the restraint operates within New South Wales. It operates wherever the new employment or consultancy is with a business “which carries on a business similar or related to the Business” with no express mention whether that business happens to compete or not though I am satisfied that later requirement must be implicit. However, as I point out when dealing with that covenant later, it is now settled that s4(1) of the Act deals with the actual breach in question rather than imaginary breaches in determining the validity of a restraint in a particular case. Thus in Orton v Melman (supra) at 587-8 McLelland J said:

“Whether, and if so the extent to which, the court will have to define the outer limits of validity of a restraint in a particular case, will depend upon the nature, and degree of generality, of the relief which in that case it is necessary or proper for the Court to grant. For example, where injunctive relief is granted, the duration of a valid restraint of any breach enjoined will have to be determined. In applying s4(1) the court should consider the circumstances of the particular case before it and determine the validity of the restraint to the extent that it purports to operate in those circumstances and it is unnecessary to consider its purported operation in other conceivable sets of circumstances. Other considerations may of course arise in an application under sub-s (3) of s4. In my opinion the enactment of s4(1) has succeeded in requiring attention to be concentrated on ‘the actual breach’ rather than ‘imaginary breaches’ for the purpose of determining validity of a restraint.”

80    It is clear here that the actual breach is employment with Mortgage Professionals and only in relation to that employer. I have already concluded that its business is in competition with the Plaintiffs’ business.

Referrer restraint and validity

81 Turning to the scope of the relevant restraints as they apply to the particular claimed breaches, the referrer restraint does not fit aptly with the earlier quoted test proposed by Professor Blake. Here, one is not dealing with replacement or supervision of one blue-collar worker with another, readily able to master the job. Rather we are dealing with the replacement of a referrer relationship that requires considerable time and effort to establish and whose fructification in terms of referrals requires a relatively long lead-time. Indeed if Professor Blake’s test of the time taken for a reasonably competent new employee to master the job were applied, that time period when related to a referrer would necessarily have to take into account both the period of time required to create the relationship and the time for it to fructify; twelve months would not be an unreasonable estimate of that period. 82 Thus I am satisfied that the twelve months stipulated does not exceed a reasonable period, looking at reasonableness as between covenantor and covenantee. Looking more broadly to the public interest and in particular as affecting the Defendant’s new employer, Mortgage Professionals, its competitive capacity is simply denied the embargoed springboard that unconstrained access to the Plaintiffs’ referrers would otherwise provide. It certainly does not drive Mortgage Professionals out of business so as to deny the public the benefit of that competition. No such submission was put to that effect. The public continue to have access to the mortgage origination services provided by Mortgage Professionals with many other competitors in the market. 83 Accordingly, I would conclude that the referrer restraint satisfies the requirement for validity set out in s4(1) of the Act.

Client restraint and validity

84 Turning to the client restraint, the clients here are to be taken to be those who have used the services of the Plaintiffs in seeking mortgage accommodation. I am similarly satisfied that the “package”, to use Young J’s phrase, is not unreasonable in terms of s4(1) of the Act. While here Professor Blake’s test of the substitute reasonably competent new employee may be more reasonable, I note that even in that situation, Young J would not have considered that a period of six months to a year was necessarily too long. The employee here was a senior one, one of only two, familiar with all the referrers and indeed vitally involved in maintaining the list. He was also, it can be said, likely to be familiar with all the clients in a small business and central to it. So the aspect of unreasonableness that applies in a large organisation where one employee may have little contact with more than a small fraction of employees is not applicable here. 85 Accordingly, I consider that the client restraint is reasonable and satisfies the requirements for validity under s4(1) of the Act.

Constraint on dealing with any other person — validity

86 I do not consider the very generalised constraint on dealing with any person dealt with in the course of employment to be reasonable or such as to satisfy the requirement for validity in s4(1) of the Act. The restraint is simply too wide in its ambit with no evident justification for its reasonableness.

Constraint on dealing with previous bank or insurance company — validity

87 Turning to the restraint on dealing with any bank or insurance company with which the Defendant has dealt, being in particular in the present instance Bank West and Westpac, while I am satisfied that these two entities were dealt with by the Defendant, I am not satisfied that such a restraint is reasonable or would satisfy s4(1) of the Act in terms of its validity. Similarly, with Australian Mortgage Securities. These lending institutions are active in the mortgage market. It would severely constrain an employer of the Defendant if, notwithstanding that the employer had previously dealt with Westpac or Bank West, as can be assumed to be likely, the new employer were thereafter constrained in dealing with those lending institutions despite their likely prominence as mortgage lenders. 88 It follows that I conclude that the restraint on dealing with “banks or insurance companies” is unreasonable and against public policy in terms of s4(1) of the Act.

Constraint on employment or retainer — validity

89 It will be apparent from the foregoing that the general constraint on employment or retainer with the new employer or promoting the new employer being respectively, cl 5.2(a) and 5.2(b), though capable of applying to constrain employment with a non-competing business elsewhere in New South Wales similar in character, should not in the present context be dealt with by reference to such an imaginary breach. Rather, the focus is on the actual breach in terms of the relief sought, being the breach constituted by employment with Mortgage Professionals. I am satisfied that the Defendant is precluded by the relevant clauses from such employment and that the operation of those provisions is not contrary to the public interest in terms of s4(1) of the Act in their actual operation in the present circumstances.

Question 3 — Relief

90    Having regard to the conclusions I have reached in questions 1 and 2, the Plaintiffs are entitled to the relief sought both by way of injunction in relation to any future contravention of the relevant restraints (other than those dealt with in paras 87 and 88 above), limited to twelve months where so stipulated, and to either damages or an account of profits. The Plaintiffs must elect as between damages or an account of profits and I am satisfied that there is a sufficient degree of fiduciary fault for the latter. But the Plaintiffs may if they choose elect differently so far as use of the referrer list is concerned from how they elect in relation to the other relevant breaches where there is no aspect of confidential information directly involved. I here adopt what was said by Young J in Dalysmith Corporation (Australia) Pty Ltd v Cray Personnel Pty Ltd who succinctly and helpfully delineates the relevant principles applicable in requiring such an election:

“There is …. the possibility of there being damages at common law for breach of contract, damages under Lord Cairns’ Act or an account of profits. When damages are available at common law there is usually no call for any award of damages under Lord Cairns’ Act: ASA Constructions Pty Ltd v Iwanov [1975] 1 NSWLR 512. The choice is, accordingly, between common law damages and an account of profits. However, there may be some call for equitable damages where there has not been a common law breach of contract.
The distinction between an account of profits and damages was stated by Windeyer J in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25, 32 as “by the former the infringer is required to give up his ill-gotten gains to the party whose rights he has infringed: by the latter he is required to compensate the party wronged for the loss he has suffered.” As Windeyer J went on to say, ‘The two computations can obviously yield different results, for a plaintiff’s loss is not to be measured by the defendant’s gain, nor a defendant’s gain by the plaintiff’s loss. Either may be greater, or less, than the other.’
Whilst the plaintiff can apply for damages and an account of profits in the alternative, it usually can obtain judgment for only one or the other and the election must be made before any enquiry into the quantum of monetary relief is embarked upon: Led Builders Pty Ltd v Eagle Homes Pty Ltd (No 3) (1996) 36 IPR 293, 300 and see Neilson v Betts (1871) LR 5 HL 1 which was affirmed by a subsequent sitting of the House of Lords as De Vitre v Betts (1873) LR 6 HL 319. It must be noted, however, that there is the odd case where both remedies may be awarded, see eg Timber Engineering co Pty Ltd v Anderson [1980] 2 NSLWR 488.
The reason for requiring an election is that by taking an account of profits flowing from an act, the plaintiffs virtually adopt that act. After such an election, there can be no further claim for damages flowing from a wrongful act, Watson v Holliday (1882) 20 Ch D 780, 783.
…..


Generally speaking, there is no right to an account of profits. Such an order will be made if a court of equity considers the remedy appropriate. It may be that the court will not consider it appropriate to award such a remedy if the degree of fiduciary fault on the part of the defendant is small (cf Seager v Copydex Ltd [1967] 1 WLR 923 and note by Gareth Jones in (1970) 86 LQR 463, 487). Again, the difficulties in assessing the profits may make a court order damages instead of an account, see Dean, The Law of Trade Secrets, (LBC Sydney, 1990) p 330.
Where an account of profits is sought then the word “account” itself suggests that the matter must be referred to a Master or a referee to look at the accounts. It is not a matter that the Judge can deal with at the trial.”
ORDERS AND COSTS

91    So far as costs are concerned these should ordinarily follow the event and be ordered in favour of the Plaintiffs. However, I give the parties leave to address me on costs if they wish. 92    I direct the parties to submit orders as soon as possible giving effect to this judgment. **********

Last Modified: 09/25/2000