Woolworths Ltd v Olson

[2004] NSWCA 372

CITATION:	WOOLWORTHS LIMITED v Mark Konrad OLSON [2004] NSWCA 372 revised - 20/10/2004
HEARING DATE(S):	6 October 2004
JUDGMENT DATE:	6 October 2004
JUDGMENT OF:	Mason P at 1; McColl JA at 78; Bryson JA at 79
DECISION:	Appeal upheld.
CATCHWORDS:	Restraint of trade - employment contract - whether restraint contravenes public policy - whether capable of being read down to give reasonable operation - whether void for uncertainty - scope of injunction - restraint payment - Restraints of Trade Act 1976, s4. - (D)
LEGISLATION CITED:	Industrial Relations Act 1996 Jurisdiction of Courts (Cross-Vesting) Act 1987 Restraints of Trade Act 1976
CASES CITED:	J D Heydon, The Restraint of Trade Doctrine 2nd ed, 1999 Buckley v Tutty (1971) 125 CLR 353 Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 Geraghty v Minter (1979) 142 CLR 177 Harper v Candle Australia Ltd [2001] NSWIR Comm 77 ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640 Industrial Rollformers Pty Ltd & Anor v Ingersoll-Rand (Australia) Ltd [2001] NSWCA 111 Knogo Corporation v Halligan (1984) ATPR 40-460 Kone Elevators Pty Ltd v McNay & Anor (1997) ATPR 41-564 Littlewoods Organisation Ltd v Harris [1977] 1 All ER 1472 Nordenfelt v Maxim Nordefelt Guns & Ammunition Co Ltd [1894] AC 535 Orton v Melman [1981] 1 NSWLR 583 Queensland Co-operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260 Rouen v Ryan [2001] NSWCA 230 Ryan v Rouen [2002] NSWSC 468 Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 Woolworths Limited v Olson & Anor [2004] NSWSC 896 Woolworths Ltd v Mark Konrad Olson & Anor [2004] NSWSC 849 Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317
PARTIES :	WOOLWORTHS LIMITED Mark Konrad OLSON
FILE NUMBER(S):	CA 40843/04
COUNSEL:	Appellant: R M Smith SC/ M A Jones Respondent: D Gardner (Solicitor)
SOLICITORS:	Appellant: Clayton Utz Lawyers Respondent: Maddocks Lawyers

LOWER COURTJURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	SC 50116/04
LOWER COURT JUDICIAL OFFICER :	Einstein J

CA 40843/04

MASON P
McCOLL JA
BRYSON JA

Wednesday 6 October 2004

WOOLWORTHS LIMITED v Mark Konrad OLSON

BACKGROUND

The Respondent was employed as an executive with the Appellant having managerial responsibility for a confidential project known as StockSMART. In this capacity he was part of a team developing a software system designed to transform Woolworths’ product supply procedures. On 5 July 2004 he gave notice of resignation to Woolworths and on 7 July signed a contract of employment with Franklins. On 12 July 2004 the Respondent was dismissed by Woolworths for breaching his contractual and fiduciary duties in relation to confidential information. On 2 July 2004 he had sent by email to his wife’s computer documents relating to the software project that were extremely confidential and valuable.

Clause 10 of the Respondent’s Service Agreement contained a restraint which, at Woolworths’ discretion and subject to paying a “restraint payment” equivalent to his contractual pay entitlements for the period of the restraint, would restrict him from being involved in a Competitive Business in Australia and New Zealand for a period not exceeding 12 months. At the time of dismissal the Respondent was given a notice restraining him for a period of 6 months from being involved in a competitive business, including Franklins. The Respondent was given a corresponding restraint payment.

Einstein J dismissed the Appellant’s claim to enforce the restraint clause on the basis that clause 10 was invalid for being unreasonable in its scope and incapable of being read down to give it a reasonable operation. Woolworths appealed to this court seeking an injunction in the following terms:

The respondent is restrained from directly or indirectly whether alone or otherwise and whether as an employee or otherwise carrying on or being engaged, involved or otherwise interested in or concerned with Franklins Pty Ltd or any other supermarket business with which Woolworths Ltd competes in Australia for a period expiring 12 January 2005.

HELD per Mason P (McColl and Bryson JJA agreeing) upholding the appeal:

1. The injunction sought is consistent with cl 10 and would not contravene public policy.

• The restraint protects a legitimate and properly protectable interest of the appellant;

• The restraint does not prevent the Respondent from earning a living, particularly in light of the provision for restraint payment;

• s4(1) of the Restraints of Trade Act 1976 provides capacity to ensure public policy is not contravened by allowing cl 10 to have unreasonable ambit.

2. The common law principles as to severance of an unreasonably termed restraint of trade (as was applied by the trial judge) do not constrain the application of s4: Orton v Melman [1981] 1 NSWLR 583; Kone Elevators Pty Ltd v McNay & Anor (1997) ATPR ¶41-564; Rouen v Ryan [2001] NSWCA; Industrial Rollformers Pty Ltd & Anor v Ingersoll-Rand (Australia) Ltd [2001] NSWCA 111.

3. The clause is not void for uncertainty merely because the Appellant has an option to trigger the restraint or the capacity to lessen the 12 month outer limit of the restraint.

ORDERS

1. Appeal upheld

2. Order that until 12 January 2005 the respondent be restrained directly or indirectly whether alone or otherwise and whether as an employee or otherwise from carrying on or being engaged, involved or otherwise interested in or concerned with Franklins Pty Ltd or any other supermarket business with which Woolworths Ltd competes in Australia.

CA 40843/04

MASON P
McCOLL JA
BRYSON JA

Wednesday 6 October 2004

WOOLWORTHS LIMITED v Mark Konrad OLSON

JUDGMENT

1 MASON P: The respondent held various positions in the appellant’s employment between 1985 and 2004. By April 1994 he had moved into highly paid managerial positions. By 1999 he had qualified for the Executive Option Plan. In January 2002 the respondent had become the Manager of a project known as StockSMART. In February 2003 the parties entered into a written Service Agreement regulating the terms of the respondent’s employment with executive status.

2 Events in early July 2004 brought the respondent’s employment to an end. The respondent contended in the court below that he had on 5 July 2004 resigned from employment with Woolworths with effect from 2 August 2004. The appellant contended that it had dismissed the respondent for misconduct on 12 July 2004.

3 Three sets of proceedings were commenced which, by various means (including orders made under the cross-vesting legislation), came to be heard and determined by Einstein J in the Commercial List of the Equity Division. On 9 July 2004 Woolworths commenced proceedings in the Federal Court against Mr and Mrs Olson obtaining an Anton Pillar order that day. On 28 July 2004 Mr Olson commenced proceedings against Woolworths in the Industrial Relations Commission, seeking relief under s106 of the Industrial Relations Act 1996.

4 On 2 August 2004, proceedings were commenced in the Equity Division by Woolworths seeking orders under the Jurisdiction of Courts (Cross-Vesting) Act 1987 to have the s106 proceedings removed into the Supreme Court and transferred to the Federal Court. Subsequently consent orders were made whereby the Federal Court proceedings were transferred to the Supreme Court where they were consolidated with the removed s106 proceedings and the proceedings initiated in the Supreme Court.

Background facts

5 The summary of the background facts is taken from the reasons for judgment of Einstein J given on 22 September 2004 (Woolworths Ltd v Mark Konrad Olson & Anor [2004] NSWSC 849).

6 The respondent had access, through his employment, to valuable confidential information of the appellant. It involved a project (“Project Mercury”) which relates to a software system designed to transform Woolworths’ product supply procedures. Access to this project was restricted to key employees directly involved in the project (J265(b) and (c)).

7 The respondent contended in the court below that the Service Agreement was displaced during February 2004, when he was demoted by Woolworths. This contention was rejected on the basis of the trial judge accepting the evidence of Woolworth’s witnesses on critical conversations (see J64-68).

8 In May 2004 the respondent was approached by McKenzie Consulting who inquired as to his willingness to take a job with Franklins. It was clear that the job would engage the respondent’s skills and experience stemming from his recent employment with the appellant. In the initial conversation with the management consultant, Ms McDonald, Ms McDonald said:

One of the roles is in DC (Distribution Centre) management focussing on the effective liaison of the retailer’s business which is managed via a third party logistics provider. This requires a level of experience in the Supply Chain area and also contractual arrangements. The other role is setting up a replenishment team, process and systems to oversee and manage stock into and out of the DCs of the third party logistic provider. The timeframe for the completion of these activities is very tight. I feel that your skill set is a good match for this role.

9 From 22 June 2004 onwards the respondent was negotiating with Franklins executives about the terms and conditions of possible employment with them.

10 On the respondent’s case at trial, the respondent accepted an employment offer from Franklins on Monday 5 July 2004. The evidence placed before us reveals that it is a significant employment opportunity that will only be available for acceptance this week. If the respondent is unable to take up the employment with Franklins it will be a significant hardship to him.

11 Friday 2 July 2004 was the respondent’s last day in his office at Woolworths, he having arranged to take one week’s annual leave over the following week. At 7.23am on 2 July the respondent forwarded by facsimile to the Franklins representatives a copy of the Service Agreement. At 7.37am and 7.42am that day he sent emails from his work computer to his wife’s home computer. These emails enclosed particular files and a document relating to Project Mercury that were extremely confidential and valuable (see J43-44, 256, 263). Einstein J found that access to this information would be of value to a competitor (J267), Franklins in particular. At J277 his Honour held that the information was likely to be of considerable utility in the respondent’s liaison with Franklin’s senior supply chain specialist.

12 On 5 July 2004, while he was in Victoria, the respondent received formal confirmation of an offer of employment with Franklins in the role of “Replenishment Buyer” at a remuneration package of $200,000. He accepted by phone and promptly gave notice of resignation to the appellant effective from 2 August 2004, informing the appellant that he would be taking up employment at Franklins. On 7 July he signed a Contract of Employment with Franklins.

13 On 9 July the appellant obtained an Anton Pillar order from the Federal Court. It was executed on 12 July 2004 at the respondent’s home. The documents relating to Project Mercury were deleted from Mrs Olson’s computer.

14 During execution of the Anton Pillar order the respondent was handed Notice of Dismissal signed by Mr Corbett, Woolworths Chief Executive Officer. The letter provided as follows:

It came to Woolworths’ attention on 6 July 2004 that on Friday 2 July between 7.37am and 7.42am you sent several highly confidential and Woolworths’ proprietary documents regarding Project Mercury to your wife’s email address. This was only a matter of days before you tendered a letter of resignation dated 6 July 2004.
Your conduct referred to in the abovementioned paragraph, constitutes wilful misconduct and wilful breach of duty, being both a blatant breach of your confidentiality obligations as contained within the Agreement, and a breach of your fiduciary duties to Woolworths.
Accordingly, your employment with Woolworths is terminated pursuant to clause 7(b) of the Agreement effective immediately.

15 Einstein J rejected the respondent’s claim that he had a legitimate reason for sending the emails to his wife’s home computer. His Honour held:

In the result the finding is that prior to the sending of the subject emails to the home computer, Mr Olson had decided to resign his employment with Woolworths, to take up the employment offer of Franklins and to keep the subject email attachments in the home computer, being materials he thought might, albeit privately, assist him in the performance of his duties at Franklins. He believed that the Franklins offer would be confirmed in writing and that the restraint clause issue would not provide a real hurdle to consummation of the job offer, albeit that Franklins would be looking at the restraint provision.

16 Einstein J held that the respondent made the decision to go to Franklins on 1 July and that the sending of the emails to his wife’s computer was a step along that way. It was therefore a flagrant breach of the respondent’s contractual and fiduciary duties, a breach of confidence and conduct justifying summary dismissal in accordance with cl 7(b) of the Service Agreement (set out at J207). The key findings are at J129, 198, 221, 225-228, 267-272 and 360.

17 Einstein J held that any claim for relief under the Industrial Relations Act failed on its merits (see esp J359-361, 372). His Honour rejected Woolworths’ submission that the contract of service exceeded the jurisdictional limit imposed by s108 of the Industrial Relations Act (J378ff). It is noted that the appellant maintains that objection and would wish to agitate it in this Court if it were necessary to do so.

18 I have dealt only with those portions of the judgment below that are relevant to these proceedings.

19 Einstein J made final orders on 28 September 2004 (see Woolworths Limited v Olson & Anor [2004] NSWSC 896 for his reasons).

The restraint of trade issue

20 Clause 10 of the Service Agreement provided:

10. RESTRAINT
(a) (i) Within 14 Business Days of the termination (whether by breach of this Agreement or not) or expiry of this Agreement the Company may, in its sole and absolute discretion, by written notice to the Executive, elect that the restraint provided for by this clause shall apply to the Executive.
(ii) The Executive acknowledges that these restraints are reasonable in terms of their geographic scope, duration and the activities restricted and having regard to the duties performed. The Executive also acknowledges that:
1. These restraints go no further than is necessary to protect the legitimate business interests of the Company;
2. These restraints do not unreasonably restrict the Executive’s rights or otherwise work harshly; and


(b) The written notice referred to in paragraph (a) must be followed by a cheque drawn in favour of the Executive for each month of the Restraint Period, for the amount as determined in accordance with paragraph (d).

(c) Where written notice incorporating reference to the Restraint Payment in accordance with paragraphs (a) and (b) are given to the Executive, the Executive agrees to be bound by the Restraint.

(d) For the purposes of this clause 9:

(i) “Restraint” means during the Restraint Period and in the Geographical Area not carrying on or being engaged, involved or otherwise interested in, or concerned with (whether directly or indirectly or alone or in partnership or joint venture and whether as trustee, principal, agent, shareholder, director, unitholder, consultant to or in any other capacity), a Competitive Business (other than as the holder of less than a 5% legal, beneficial or economic interest in shares or other securities which are issued in the capital of a public company whose shares are quoted on a stock exchange).
(ii) “Competitive Business” means any business with which the Company competes in the Geographic Area.
(iii) “Restraint Period” means the number of months, as determined by the Board or CEO, at their/his absolute discretion and notified to the Executive, not exceeding 12 months, commencing from the date this Agreement terminates or expires, as determined by the following formula after rounding down fractions to the nearest whole number:
A
B X 12

where:
A means the amount of the Restraint Payment net of income tax; and
B means the aggregate of the amounts paid or payable to the Executive under clauses 3.1(a), 3.2(a), 3.4 and 3.5 in respect of the 12 month period immediately preceding the date of termination or expiry of this Agreement, net of income tax.
In the event that the formula produces a number in excess of 12 then the Restraint Period is 12 months.
(iv) “Geographical Area” means Australia and New Zealand or such location as the Company operates or has competitors.
(v) “Restraint Payment” means such amount determined by the Board of the Company or the CEO in its/his absolute discretion.
(e) For the avoidance of doubt, a payment of the Restraint Payment is in addition to any other payment which the Company is required to pay the Executive in accordance with this Agreement.

21 When Mr Olson was handed his letter of termination on 12 July he was also given a letter enclosing a Notice pursuant to cl 10(a)(i) restraining him for a period of six months “in Australia and New Zealand from carrying on or being engaged, involved or otherwise interested in, or concerned with … a Competitive Business …”. The Notice confirmed that Franklins was a Competitive Business. Mr Olson was also given a cheque for $60,650 as a “Restraint Payment” calculated in accordance with cl 10. It represents in effect the continuation of his contractual pay entitlements for the 6-month period of the restraint chosen by the appellant in accordance with cl 10.

22 Woolworths’ claim to enforce the restraint clause was dismissed by Einstein J on the basis that cl 10 was invalid.

23 The appellant promptly indicated its intention to appeal against this particular decision. There are other orders that the appellant may seek to challenge. These relate to the exercise of an option to acquire Woolworths shares that the respondent exercised on 1 July 2004, and the remedies stemming from misuse of confidential information. The resolution of those issues in the Court of Appeal is likely to be complex and is not appropriate for an expedited hearing. Likewise any cross-appeal that the respondent may choose to bring. Except for the issues being disposed of today the parties naturally remain free to appeal or cross-appeal against any of the orders of Einstein J.

24 This appeal relates only to the dismissal of the claim to enforce the restraint of trade. It was expedited by Bryson JA on Friday last.

25 Einstein J made the following order in aid of the appellant’s right to appeal against his refusal to grant an injunction restraining the respondent from commencing employment with Franklins:

18. Orders that, upon the Plaintiff, by its Counsel, giving the usual undertaking as to damages, for the period up to and including midnight on Tuesday, 5 October 2004, the First Defendant be restrained from directly or indirectly, whether alone or otherwise and whether as employee or otherwise, carrying on or being engaged, involved or otherwise interested in, or concerned with, Franklins Pty Limited or any other business with which the Plaintiff competes in Australia and New Zealand.

26 This order has been continued by consent until today to enable the determination of this issue on appeal.

27 The issue is urgent because the restraint (if enforceable) would operate for 6 months from 12 July 2004 and because Mr Olson and his new employer wish him to commence employment with Franklins forthwith.

28 It is appropriate for the Court to make an order for the separate determination of the questions agitated at this hearing. The appellant suggested that it be framed by reference to grounds 1 and 2 of the Notice of Appeal and that is what will be done.

The parties’ arguments on appeal

29 The appellant submits that Einstein J erred in that he failed to apply the general principles of contract interpretation to the expression “Competitive Business”. Had he done so, he would have concluded that the restraint was not unreasonably broad in scope and its application to the respondent’s situation.

30 Alternatively, it is submitted that the primary judge erred in failing to apply s4(1) of the Restraints of Trade Act 1976. Had this been done, an appropriate injunction could have been framed that was within the scope of the contractual restraint and inoffensive to the policies of the restraint of trade doctrine.

31 The respondent submits that cl 10 is void for uncertainty, therefore being incapable of engaging s4(1). The uncertainty stems from the duration of the restraint being unknown at the formation of the contract and subject to triggering at the discretion of Woolworths.

32 Alternatively, it is submitted that the restraint is void as against public policy because it goes beyond what is necessary to protect the appellant’s trade secrets. An appropriate injunction against disclosure of confidential information (such as that granted by Einstein J in order 7 made on 28 September 2004) would be sufficient in all of the circumstances, particularly in light of the fact that the offending emails were never opened and have now been deleted from Mrs Olson’s computer.

33 The scope of the contractual restraint is said to be unreasonably broad because of the range of businesses Woolworths engages in, the scope of the word “competes” and the geographical reach of the restraint. (It has now become clear that Woolworths subsidiaries are not involved in the contractual restraint.)

34 It is further submitted that the primary judge was correct to find that the terms “any business” and “competes” were simply too wide. Blue-pencilling and reading down are not available, at least without altering the nature of the contractual restraint. In particular, the definition of “Competitive Business” cannot be read down by any legitimate process of contract construction to confine itself to supermarket business.

35 Turning to the application of s4(1), the respondent submits that the section provision is not available to redraft the covenant. He cites Young J in Ryan v Rouen [2002] NSWSC 468 at [55](vi). Woolworths should have done a better job defining “Competitive Business”. The court cannot do it for the appellant by resort to s4(1).

36 Alternatively, the respondent invokes s106 of the Industrial Relations Act 1996. The jurisdiction conferred by that provision is separate to that available under the Restraints of Trade Act 1976. The respondent cites the judgment of Glynn J in Harper v Candle Australia Ltd [2001] NSWIR Comm 77. Section 106(2) allows the unfairness of a work contract arising after its formation to be taken into account. The respondent submits that cl 10 attracts a favourable exercise of s106 for the following reasons:

88.1 Mr Olson was not able to know at the time of entering into the service agreement with any certainty whether Woolworths, in its sole and absolute discretion (and without prior consultation or agreement), would invoke the restraint;
88.2 Woolworths seeks to have the covenant operate to its fullest extent, to prevent Mr Olson from being employed in the only industry in which he has been employed and during which he has developed skills, expertise and know-how specific to the industry;
88.3 The restraint is uncertain as to its duration and area, and operation of the duration and area was not capable of being known at the time the contract was entered into (which makes it almost impossible for an employee to predict with any certainty whether another offer of employment can be accepted in any competitive business in Australia or New Zealand for up to 1 year);
88.4 The operation of the restraint was notified only at the moment the Appellant served notice of his summary termination, and in circumstances where there was no forewarning;
88.5 If the restraint is given full effect Mr Olson will lose the benefit of future employment at Franklins [see letter from Franklin’s solicitors dated 1 October 2004], and it is questionable whether the Appellant’s undertaking as to damages will ever compensate Mr Olson for the loss of what may well be a very promising future career at Franklins;
88.6 The restraint payment is inadequate consideration for the loss of better future employment remuneration, including the loss of non-monetary employment benefits and other entitlements that would have been accrued in continued employment with Woolworths or in other employment such as at Franklins;
88.7 As has been held at first instance, Mr Olson was entitled to assert that the restraint was invalid, and the conduct of the Appellant since unilaterally invoking the restraint on 12 July 2004 has caused Mr Olson great emotional and financial hardship, including the right to have been remunerated for the last 3 months and to enjoy the emotional security and satisfaction of applying his skills, expertise and know-how in an industry to which he is best suited and is best able to mitigate his loss.
Analysis

37 The restraint operates within a classical area, namely a fixed period after termination of employment. A restraint of trade is justifiable only if the restriction is reasonable in reference to the interests of the parties and of the public (Nordenfelt v Maxim Nordefelt Guns & Ammunition Co Ltd [1894] AC 535 at 565). If it is not, the restraint will be contrary to public policy and invalid (Buckley v Tutty (1971) 125 CLR 353 at 376).

38 The courts in general take a stricter and less favourable view of covenants in restraint of trade entered into between employer and employee than of similar covenants in commercial agreements (Geraghty v Minter (1979) 142 CLR 177 at 185). The reasons are explained in J D Heydon, The Restraint of Trade Doctrine 2nd ed, 1999 at pp68-9. It is nevertheless well established that an employer may have interests capable of protection by a restraint covenant. These interests go beyond protection of goodwill and retention of customers and extend to trade secrets (Heydon, op cit, pp87-8, Knogo Corporation v Halligan (1984) ATPR ¶40-460, Kone Elevators Pty Ltd v McNay & Anor (1997) ATPR ¶41-564). This was the trigger for the Service Agreement (see the covering letter of 7 February 2003). Merely because the law offers a degree of protection against the unauthorised use or dissemination of trade secrets by former employees does not mean that contractual protection is necessarily unreasonable or unavailable.

39 The court gives considerable weight to what parties have negotiated and embodied in their contracts, but a contractual consensus cannot be regarded as conclusive (see eg Queensland Co-operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260 at 268), even where (as in the present case) there is a contractual admission as to reasonableness.

40 The validity of the restraint is to be tested at the time of entering into the contract and by reference to what the restraint entitled or required the parties to do rather than what they intend to do or have actually done (Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 at 344).

41 The common law did not countenance the severance of an excessive and therefore unreasonable restraint. If the undertaking went beyond what was reasonable it was void and unenforceable even though a covenant addressing the breach established would have been reasonable. Section 4(1) of the Restraints of Trade Act 1976 overturned this. So far as relevant, s4 provides:

(1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not.
(2) Subsection (1) does not effect the invalidity of a restraint of trade by reason of any matter other than public policy.
(3) Where, on application by a person subject to the restraint, it appears to the Supreme Court that a restraint of trade is, as regards its application to the applicant, against public policy to any extent by reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint, the Court, having regard to the circumstances in which the restraint was created, may, on such terms as the Court thinks fit, order that the restraint be, as regards its application to the applicant, altogether invalid or valid to such extent only (not exceeding the extent to which the restrain is not against public policy) as the Court thinks fit and any such order shall, notwithstanding subsection (1), have effect on and from such date (not being a date earlier than the date on which the order was made) as is specified in the order.
…
(5) An order under subsection (3) does not affect any right (including any right to damages) accrued before the date the order takes effect.

42 This provision was authoritatively expounded by McClelland J in Orton v Melman [1981] 1 NSWLR 583. First, the court determines whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed. Next, the court determines whether the restraint, so far as it applies to that breach, is against public policy. If it is not, the restraint is valid, subject to any order which may be made under s4(3).

43 McClelland J continued (at 587-8):

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 subs(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.

44 These principles have been endorsed in later decisions, including cases in this Court (see Heydon, op cit, at p235, Kone Elevators, Rouen v Ryan [2001] NSWCA 230, Industrial Rollformers Pty Ltd & Anor v Ingersoll-Rand (Australia) Ltd [2001] NSWCA 111). In Industrial Rollformers Giles JA (with whom Priestley and Meagher JJA agreed) said (at [165]):

The operation of s4(1) of the Act is now relatively well settled. It does not permit the Court to remake the contract or a covenant in it, and although sometimes it is said that it allows the covenant to be read down or redrafted that is really an inaccurate description. The provision looks to the postulated breach, and permits the Court to enforce a covenant otherwise invalid as against public policy if the restraint in the covenant so far as it applies to the postulated breach is not contrary to public policy. The Court is given the capacity to enforce a reasonable restraint of trade falling within the expressed restraint although the expressed restraint is too widely stated. It is sufficient to refer to Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564 at 43,833 and the cases there cited, which include Orton v Melman .

45 Section 4(1) allows the court to ignore the fact that the restraint goes beyond what is reasonable, provided the restraint can be enforced to an extent that is reasonable. The subsection permits the court to enforce a covenant whose provision is overextensive as regards area, time or extent. Discussion about the provision’s use in relation to an overly broad description of the restrained conduct may be found in Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 337-8 (per Kirby P).

46 The court may not rewrite the covenant while exercising the power under s4(1). In the language of this Court in ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640 at 674:

… a restraint validated by the section must fall wholly within the scope of the contractual provision. Amputation is directed but reconstruction is not.

47 “Amputation” is not confined to blue-pencilling. As Sheller JA pointed out in Kone Elevators (at p43,833):

If the Court can read down a covenant in restraint of trade, otherwise void as against public policy, to an extent that makes its enforcement not against public policy, the Court may restrain a breach of the covenant so read down. …. By this means a party may be able to restrain a particular breach of a covenant even though the covenant is expressed in terms so wide as to be void as against public policy at common law. Section 4(1) of the Act has confirmed and enlarged the capacity of the Court to enforce just and reasonable covenants which may on their face be too widely expressed.
This passage was approved by Beazley JA (with whom Rolfe AJA) agreed in Rouen .

48 It is, with respect to Einstein J, a little unclear as to what was the precise basis upon which cl 10 was found to be invalid. The uncertainty stems from his Honour’s general discussion of s4(1) (at J285-7) coupled with the absence of any direct application of the statute at the critical portion of his decision (at J290-308).

49 It was common ground on the pleadings that Franklins was a competitor of Woolworths in the supermarket and retail industry in New South Wales. Einstein J found that Franklins was one of Woolworths “major competitors” (J277). This would have been the situation when the Service Agreement was entered into.

50 Einstein J held that cl 10 was unreasonable in its scope and incapable of being read down to give it a reasonable operation. His essential reasoning at [290]-[308] is as follows:

Dealing with the matter
290 Applying the above principles to the present case and taking into account the parties respective submissions, I consider that the restraint clause in clause 10 of the defendant’s Service Agreement is invalid.
291 The effect of clause 10, read together with the notice pursuant to clause 10(a)(i) referred to earlier in these reasons, is that the defendant is restrained for a period of 6 months “in Australia and New Zealand from carrying on or being engaged, involved or otherwise interested in, or concerned with…a Competitive Business…”
292 The critical issue to my mind is the scope of the term “Competitive Business” and in particular the words “any business” and “competes”.
293 The term “Competitive Business” is defined in clause 10(d)(ii) to mean:

“…any business with which the Company competes in the Geographic Area.”
294 The term “Geographic Area” is defined in clause 10(d)(iv) to mean:

“…Australia and New Zealand or such location as the Company operates or has competitors”
295 In the present case, the relevant Geographic Area nominated by the plaintiff was Australia and New Zealand.
296 The effect of clause 10, therefore, is to restrict the defendant for a period of 6 months in Australia and New Zealand from carrying on or being engaged, involved or otherwise interested in or concerned with any business with which the plaintiff competes .
297 The sheer breadth of this restriction cannot be understated. As noted earlier in these reasons, Mr Brookes gave evidence that the plaintiff not only operates in the supermarket industry but also beyond that industry to the electronics industry and that it has a number of competitors in both of those industries [Statement of Mr Brookes 4 August 2004 paragraphs 54-58].
298 Clause 10 operates as a blanket prohibition on the defendant being engaged in any competitive business, in any capacity, within Australia and New Zealand. Given the extent of the plaintiff’s operations, the number of industries in which it operates and the number of businesses with which it competes, clause 10 restricts the defendant from being engaged in a vast range of activities and therefore in my view goes further than is reasonably necessary.
299 In final address, the plaintiff’s counsel submitted that the definition of “Competitive Business” can be read down to any competitor operating a supermarket business. I do not accept that proposition. Such a construction only begs the question: what is a supermarket business? Such a construction seeks to defeat the plain [albeit general] words of the clause and to require the court not only to re-write the clause, but to do so in an ambiguous way. [See generally JD Heydon, The Restraint of Trade Doctrine, second edition, Butterworths, 1999 at p 111].
300 Stewart (supra) draws attention to the decision of Pincus J in Talk of the Town Pty Ltd v Hagstrom (1990) 99 ALR 130. Notwithstanding that this was an interlocutory judgment, it is to be noted that the case concerned the sale to the applicant of a business which made extruded PVC (ie polyvinyl chloride) sections for use in the building industry, in making aluminium windows and aluminium-framed glass doors.
301 The relevant provision was in the following terms:

“The vendors agree that they will not exercise or carry on or be in any manner whatsoever either directly or indirectly as principal or agent concerned or interested either by themselves or in partnership or as a manager, servant, agent of any person or company in the trade or business of plastics manufacture or extrusion or in any trade or business similar to or in competition to that business during the period of…”
302 There followed a list of five periods of time and of three geographical areas which were, under cl 11(b), to be construed as creating all possible combinations, ie 15 different combinations of time and area, all severable from one another.
303 Pincus J put the matter as follows:
The question is on which side of the line, drawn in such cases as Butt v Long , the present question falls…”
304 Dealing with ‘beneficial construction’ Stewart makes the following observations:

“In Littlewoods Organisation Ltd v Harris ( `Littlewoods' ) (1978) 1 All ER 1036, a restraint on employment with a particular competitor was limited neither by area nor by reference to the nature of the employment. Nevertheless, the majority of the English Court of Appeal upheld it on the basis that it must be taken to be limited to employment in the United Kingdom, and to one aspect only of the competitor's business activities. Lord Denning MR spoke of using `a process of interpretation so as to cut down wide words to words of more limited scope', as a way of `upholding a covenant which is intrinsically just and reasonable' (at 135). Arguably this goes beyond merely giving effect to the parties' true intent and effectively involves `reading down' a restraint so as to enforce it to the extent that it is reasonable, irrespective of how widely it is drawn – a process which, as will Denning's judgment) has indeed been doubted or distinguished by Australian courts. In Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 72 ALR 643 Spender J refused to apply it, holding that the words `the business of shipbuilding of any description' were too clear to admit of any interpretation which might narrow their application to the particular type of shipbuilding carried on the parties at the time of the agreement. In Rentokil Pty Ltd v Lee (1995) 183 LSJS 444 at 488 Debelle J described Littlewoods as an `extreme example' of the principle that restraints should be interpreted by reference to what the parties intended to achieve, and indicated (without deciding the matter) that it might well `extend the principle too far'.

[emphasis added]
305 Having referred to Talk of the Town Stewart continues:

“The better view then is that the process of `beneficial construction' should be limited to situations in which common sense suggests that the parties intended to give the words of their covenant a more limited meaning than they would otherwise appear to bear. This should not be turned into a process of `re-writing [the contract] so as to make enforceable that which would otherwise be unenforceable ', as Browne LJ put it in his dissenting judgment in Littlewoods [at 1046]. The same point underlies a caution expressed by Walsh J in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 300 - 301:
There may be cases in which it is very clear that a provision would never be enforced according to its strict terms and I do not question the propriety of disregarding in such cases some theoretical possibility. But I am of the opinion that, except within very narrow limits, the court must have regard to the rights and obligations created by the agreement rather than to the manner in which it thinks it is likely that the agreement will operate in fact.

In other words, a restraint is to be tested `by reference to what the restraint entitles or requires the parties to do rather than what they intend to do or have actually done': Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 at 344, citing Adamson v NSW Rugby League Ltd (1991) 31 FCR 242 at 285; and see also Canberra Bushrangers Baseball Team Pty Ltd v Byrne (ACTSC), Higgins J, No SC707 of 1994, 21 December 1994, unreported).
[emphasis added]
306 I am unable to read down clause 10(d)(ii) so as to give it a reasonable operation. The words “any business” and “competes” are simply not susceptible to being read down without the Court re-writing the clause. I am unable to see how I can read down words of such general meaning.
307 Notwithstanding the restraint payment made by Woolworths I do not consider that payment to rebut the proposition that the subject restraint goes further than is reasonably necessary. The matter requires to be determined objectively by the Court and the restraint payment is only one of the circumstances relevant to the finding.
308 It does not appear to me that the Restraint Period or Geographic Area can be read down to give the restraint a reasonable operation.

51 The learned primary judge did not hold that cl 10 was so vague as to be incapable of meaning. His critical remarks about the breadth of the clause are to the effect that it “goes further than is reasonably necessary” (J298). This is a reference to the unreasonableness that spells invalidity according to the common law principles of restraint of trade. Likewise the authorities cited at J299-305.

52 These observations of his Honour gained particular purchase in his reference to the scope of Woolworth’s businesses and the consequential range of its competitors (see J297-8). Einstein J further held that the definition of “Competitive Business” could not be read down (as a matter of contractual interpretation) to mean any competitor operating a supermarket business (J299). I am prepared to assume the correctness of this conclusion, but it says nothing about the appellant’s capacity to invoke s4(1) of the Restraints of Trade Act. Although there have been occasional judicial references to “reading down” in the context of s4(1), this is not an accurate description of its operation (see Heydon, op cit at p235 fn 150 and Industrial Rollformers at [165] per Giles JA). The concept of strictly interpreting a contract (or statute, for that matter) to save its validity is well known, but different.

53 Section 4(1) sidesteps this learning, unless the court is faced with a case where the suggested application of that subsection would remould the contractual restraint otherwise than by narrowing its scope, or unless and to the extent that the person restrained makes out a case for relief under s4(3). Subsection (3) has not been invoked in the present case.

54 This is not the occasion for a definitive interpretation of cl 10 or for its outer limits to be probed. The appellant seeks only the reversal of the trial judge’s decision that the clause was entirely invalid and an injunction restraining breach of its core restraint in a situation where enforcement would not offend any aspect of public policy protected by the restraint of trade doctrine.

55 By engaging to become Franklins employee in the position of “Replenishment Buyer” the respondent contravened cl 10. No process of strict construction could establish that the respondent is not seeking to contradict the command of the Notice served on 12 July in accordance with cl 10. He is seeking to be engaged, involved and concerned with a business with which Woolworths competes in the “Geographical Area”. It is to elide construction with validity to argue that such a restraint is so broad as to be unreasonable and against public policy.

56 Applying the s4(1) jurisprudence, one then asks whether the contractual constraint, so far as it applies to the particular breach, is against public policy. The appellant seeks an injunction in the following terms:

The respondent is restrained from directly or indirectly whether alone or otherwise and whether as employee or otherwise carrying on or being engaged, involved or otherwise interested in or concerned with Franklins Pty Ltd or any other supermarket business with which Woolworths competes in Australia for a period expiring 12 January 2005.

57 In a case involving a threatened breach, it is legitimate to ask what injunction should go in the particular circumstances to enforce the contract. In light of the respondent’s recent past conduct as found by Einstein J, and recognising that these findings may be the subject of challenge in a later stage in these appellate proceedings, it is in my view reasonable to enforce cl 10 (if valid) by injunction framed as sought by the appellant.

58 I would reject the respondent’s submission that an injunction is unnecessary or inappropriate in light of cl 5.2 of the Service Agreement or the appellant’s rights to protect its confidential information directly, as vindicated by Einstein’s order 7. I would draw attention to his Honour’s finding at J44 that the process models which were forwarded by email to Mrs Olson’s computer were but a small portion of a vast amount of information which Mr Olson had available to him on 2 July 2004 concerning Project Mercury.

59 I return then to the question whether such an injunction as sought being consistent with cl 10 although not reaching its outer limits, would contravene public policy (see Orton at 587-8, being the passage quoted above). In my view it would not.

60 My respectful difficulty with the reasoning of the primary judge is that his Honour appears to apply the common law principles hostile to any form of severance that does not involve blue-pencilling. This case strikes me as a classical situation calling for the application of s4(1).

61 Assuming for the sake of argument that the restraint is unreasonable because it is excessive, the proposed injunction meets any concern on that account. A six-month restraint in return for the proffered payment strikes me in any event as fair and reasonable as regards duration, at least within the scope of the injunction sought.

62 Placing oneself in the position of the parties in February 2003 it is, in my view, clear that Woolworths had a properly protectable interest in securing the right to impose a post-employment restraint upon the respondent to the effect that (subject to the “Restraint Payment”) he would not become involved or interested in or concerned with a Competitive Business. (Whether the terms of the restraint were unreasonable, thereby attracting resort to s4(1) is another question, not immediately at issue.)

63 “Project Mercury” commenced in late 2002 (J8). The respondent himself attested to its value to the appellant and its superiority over Franklin’s capability (J10). By February 2003 the respondent had the status of a highly paid executive, involved with managing the StockSMART project. This position gave the respondent extensive involvement with Project Mercury (see J57, 256, 265(c)). Mr Brookes gave evidence as follows:

Establishment of the Project Mercury Team
• In early 2003, staff within Woolworths were seconded to the Project. Mr Olson was seconded to the position of Program Manager Replenishment, Mercury. The idea was to second the most knowledgeable Woolworths’ employees from parts of the business which were relevant to the improvements to the supply chain sought to be achieved by the Project. Mr Olson was appointed because he was regarded as having expertise in replenishment, forecasting and stock flow. Each of these areas of the business was to be effected by the Project.

64 What subsequently happened was, in the circumstances, indicative of the context of what both parties contemplated at the inception of the Service Agreement. The respondent was given access to the policies, details and software referable to the system being developed by the appellant at great expense and for the purpose of giving it market advantage over its competitors in the supermarket and retail industry in New South Wales at least, and in all probability throughout Australasia.

65 In June 2003 the appellant gave a letter to the respondent welcoming him formally into the Mercury program and outlining the terms and conditions of his employment as a result of his selection into that program. In the main, what was stated was the drawing to the respondent’s attention of the existing terms and conditions of employment as set out in the Service Agreement (see J50). This letter postdated the entry into the contractual restraint in February 2003. It is therefore of limited utility to the dispute as to the validity of the restraint. The letter was nevertheless a clear reminder of the importance of preserving the confidentiality of the Project Mercury information. This observation is relevant to any argument invoking s106(2) of the Industrial Relations Act concerning unfairness in the performance of the work contract. The letter is also relevant to the exercise of the discretion to grant injunctive relief as sought. (See also the observations of his Honour at J267.)

66 At the trial it became common ground that the information sent by the respondent to his wife’s computer was a valuable trade secret of the appellant. Without having to resort to the respondent’s conduct as an admission, it is clear that it was the sort of information that a rival enterprise like Franklins might covet. (I am not implying that the evidence suggests any involvement by Franklins in the sending of the e-mails.) The particular information is merely an exemplar of the type of valuable trade secret that Woolworths would have had a legitimate interest to protect, to the knowledge of the respondent, at the inception of the Service Agreement.

67 A recognised method of such protection is the procurement of a restraint upon the employee given access to such information taking up employment with a competitor whom he might be willing to provide with such information. A reasonable employment restraint is easier to enforce than a breach of confidence or breach of copyright claim; it removes the temptation for the former employee to offer and for the new employer to solicit confidential information; and it provides certainty of definition as regards the area of confidential information to be protected. These interests have been judicially recognised (see Littlewoods Organisation Ltd v Harris [1977] 1 All ER 1472 at 1479, 1485, Wright at 333, Kone Elevators at p43,834).

68 This restraint goes beyond a mere covenant against competition. It protects a legitimate interest of the appellant as acknowledged in cl 10(a)(ii) itself. The restraint does not prevent the respondent from earning a living, particularly in light of the provision for Restraint Payment and the capacity of s4(1) to ensure that public policy is not contravened by allowing cl 10 to have unreasonable ambit.

69 The respondent submitted that the restraint in cl 10 was void for uncertainty. It was submitted the restraint required the exercise of discretion of the appellant before it could be known whether it operated and to what area it extended. As at the time the contract was entered into the Court was unable to determine with any certainty whether the restraint will operate or if it does, the duration of the restraint. This submission cannot be accepted. Merely because the appellant has an option to trigger the restraint or the capacity to lessen the twelve-month outer limit of the contractual restraint does not render cl 10 void by reason of uncertainty. Many contractual obligations are of the nature as to confer a right upon one party to the contract to take action within a defined ambit.

70 Nor is cl 10 incapable of a meaning or impossible to apply. Ambiguity is not the same as voidness for uncertainty (see generally Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 436-7).

71 I find it unnecessary to consider the appellant’s alternative submission that the restraint was reasonable according to common law principles, having regard to the payment to which the respondent is entitled during the currency of the restraint.

72 I have also found it unnecessary to address the appellant's contractual interpretation argument. It was argued that the Service Agreement had to be construed in the context of its surrounding circumstances, an undoubtedly correct proposition. More controversial was the secondary submission that the apparent breadth of cl 10 (construed literally) was to be read down having regard to the particular position and particular expertise of the respondent at the time when he entered into the Service Agreement and the likelihood that he would seek post-termination employment in a similar job and/or from one of the appellant’s major competitors.

73 The circumstances in which a clearly expressed restraint of trade in an employment contract will be read down as a matter of construction at common law, particularly if necessary to avoid invalidity pursuant to the restraint of trade doctrine, are problematic (see Heydon op cit, pp108-112). The problems increase with a standard form service agreement that is designed to apply to a senior executive in a range of positions that he or she might hold in the establishment after the date of the contract. All of these difficulties are avoided by resort to s4 of the Restraints of Trade Act, particularly in the context like the present where the only relief presently claimed is an injunction that will be framed more narrowly than the contractual restraint.

74 The respondent’s invocation of s106 of the Industrial Relations Act does not lead to the withholding of injunctive relief. Even if there is jurisdiction in the present case (but cf s108A) I, like Einstein J, can see no basis for its exercise in the present context. The restraint was fair and consistent with the public interest when the Service Agreement was entered into – at least to the extent of the injunctive relief that is proposed. Nothing that occurred at the commencement or during the currency of the employment relationship since February 2003 has made it unfair in the sense of that term as set out in s105. The letter of 24 June 2003 referred to at J50 was a clear and appropriate reminder and warning about the contractual duties of executives.

75 The facts found by the primary judge as justifying summary dismissal were of such a nature that in my view there was no unfairness in exercising that right.

76 I observe that it is common ground between the parties that it is still open to the respondent to agitate on the appeal any rights stemming from s106 referable to the contract of employment and any remedial claims for damages or injunctive relief apart from those addressed in the injunction that this Court is proposing to grant.

77 For these reason I propose the following orders:

1. Order pursuant to Pt 31 of the Supreme Court Rules for the separate decision of the questions raised in grounds 1 and 2 of the Notice of Appeal with Appointment.

2. Appeal upheld in relation to those grounds.

3. Set aside declaration 8 and orders 9 and 10 made by Einstein J on 28 September 2004.

4. Order that until 12 January 2005 the respondent be restrained directly or indirectly whether alone or otherwise and whether as an employee or otherwise from carrying on or being engaged, involved or otherwise interested in or concerned with Franklins Pty Ltd or any other supermarket business with which Woolworths Limited competes in Australia.

5. Respondent to pay appellant’s costs and to have a certificate under the Suitors Fund Act 1951 if qualified.

78 MCCOLL JA: I agree.

79 BRYSON JA: Subject to one observation I agree with the judgment of Mason P. The observation relates to paragraph 299 of the judgment of Einstein J the correctness of which Mason P has been prepared to assume. This was no more than an assumption for limited purposes. I am not satisfied and I do not decide that the restraint of trade in cl 10 of the service agreement between the parties of 1 February 2003 is not valid and enforceable in its full literality in accordance with the common law. However, it is not in my view necessary to examine this subject fully or to come to a decision on it because if cl 10 were so valid and enforceable it would not in my opinion be appropriate to enforce it by an injunction in any wider terms than those proposed by Mason P. In my opinion those terms address appropriately the breach of cl 10 which it is reasonable to fear may occur during the remaining currency of the restraint. Subject to this observation I agree with the judgment of Mason P and with the order which his Honour proposed.

80 MASON P: Gentlemen, is there anything you wish to say about the proposed form of orders?

81 SMITH: Nothing other than this, the orders the Court has made upholding the appeal may have an effect upon the costs orders made below and if you can just reserve in effect that issue to a later determination of the costs question. Your Honour has ordered the costs of this appeal, but below his Honour made a different order which took into account our loss on these points.

82 MASON P: If I were to add as order 6:

6. Reserve any consequential impact of these orders upon the costs orders made at first instance until further hearing.

is that sufficient?

83 SMITH: We’re content with that.

84 MASON P: Mr Gardner, do you have anything to say about the form of the orders?

85 GARDNER: I would have preferred to have the costs issue reserved until final determination of the remainder of the appeal.

86 MASON P: Are you raising a concern about order 5 that I proposed or order 6 that I drafted on the run?

87 GARDNER: Both your Honour in that orders 5 and 6 ought to be reserved. The costs issue of both the appeal and the consequential costs resulting in my submission ought to be reserved.

88 MASON P: We have had a discrete hearing expedited to suit among others your client and it would seem that all of the costs that have been thrown at today’s hearing have been directed at the issue on which your client failed. We are not disposed to alter the orders proposed. I would state, in case there is any doubt about it, that the costs order 5 relates obviously to the costs of so much of the appeal that has taken place today, in other words the separate issue.

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Last Modified: 10/21/2004