There has been an increasing emphasis in recent years on businesses protecting their base of existing customers. This is one of the few areas which legislation has not really intruded into. It is also one of those areas where the principles are relatively clear but outcomes are not predictable. In our experience there is sometimes subtle differences in the way the courts of different states approach these cases. We thought it might be useful to look at some recent Queensland cases to give an idea of how courts in this state are handling restraint issues.
General Principles
It is not the purpose of this short article to review the principles of post employment restraints but rather look at how these principles have been implemented in practice by the courts. However, we make the following general points.
A restraint clause that imposes obligations on employees after employment terminates is prima facie void at common law unless it imposes no greater restraint than that which is reasonably necessary for the protection of the legitimate interests of the party seeking to uphold it. The onus rests on the party seeking to rely on the covenant. The options for ex employers are to seek damages for breach or more commonly urgent injunctive relief.
There are 2 main inquiries on an application for an interlocutory injunction:
- Has the applicant shown a prima facie case;
- Has the applicant shown the balance of convenience favours granting the relief sought.
To establish a prima facie case, the applicant does not have to show it will probably succeed, just that there is a sufficient likelihood of success to justify the preservation of the status quo pending the trial. How strong the probability of success needs to be depends on the nature of the rights asserted and the practical consequences if orders are made. This is sometimes described as whether there is a “serious question” to be tried – the seriousness must be sufficient to justify the order sought.
To establish the balance of convenience favours the applicant is a question of whether the inconvenience or injury suffered by the applicant if the injunction were refused is outweighed by the that of the respondent if the injunction were granted. The adequacy of a damages award and the sufficiency of an undertaking as to damages are factors to be considered in determining the balance of convenience.
The 2 inquiries are related and not independent of each other. In the first case considered, Bond J gives an example of a situation where the grant of an interlocutory injunction has the same practical effect as final relief. There, a court might require evidence of a stronger probability of success. The bottom line is that the court should weigh all relevant factors in the balance including the strength of the case and factors affecting the balance of convenience and then take whichever course appears to carry the lower risk of injustice if it should turn out to have been “wrong”.
Cases
- AECI Australia Pty Ltd v Convey [2020] QSC 207 (Bond J)
- DJRA Pty Ltd v Griffin [2020] QDC 178 (Richards DCJ)
- Australian Timber Supplies Pty Ltd v Welsh [2021] QSC 266 (Freeburn J)
AECI Australia Pty Ltd v Convey [2020] QSC 207 (Bond J)
Background facts
This is a detailed decision and worth reading for a thorough review of the principles which apply in these types of cases. The parties were AECI, Mr Convey and his new employer Incitec Pivot. The basic facts were that Mr Convey worked for an Australian subsidiary of a large diversified South African company. AECI Australia sold products in the mining field including explosive materials, initiating systems, detonators and mobile process units. This particular business was not operated globally although there was some sharing of information and strategic plans within member companies in the group, to which Mr Convey had exposure.
Mr Convey had worked in senior managerial positions since 2014, some 6 years at the time of decision. The relevant contract of employment took effect from 1 October 2017 on his promotion to senior executive level. He resigned on 13 March 2020 to take up employment with Incitec Pivot and was put on gardening leave for his 3 month notice period. His employment ended on 12 June 2020. He was due to start with Incitec Pivot on 13 July 2020.
The most relevant contractual restraints on Mr Convey were:
- not to be involved as an employee in the provision of explosive manufacturing plant management or similar services or any activity similar to that carried out by him during his employment, by any business identified in Schedule 3 of the employment contract. The new employer Incitec Pivot was covered by the description of competitors contained in Schedule 3; and
- not solicit, interfere with or attempt to entice away from AECI or any group company a material customer or customer in the habit of dealing with AECI or any group company.
The operative time restraints were 6 months or 12 months and the restraint area was Australia. Interestingly, Mr Convey was to be paid for the 12 month restraint by 3 equal payments equivalent to his salary. There was also a separate confidentiality deed which extended to any AECI group company.
AECI primarily sought to restrain Mr C from being involved:
- in the provision of explosive manufacturing plant management or similar services; or
- in any activity similar to that undertaken during his employment;
- by any entity conducting the manufacture and supply of commercial explosives and related products and services similar to that of AECI including IPL;
- for a period of either 12 months or 6 months from the end of his employment on 12 June 2020.
Restraints were also sought on his dealing with any customers in the habit of dealing with AECI including a number of specified companies.
A restraint was also sought against Incitec Pivot from engaging Mr Convey in any capacity for 12 months or 6 months in the explosives area on the basis of the tort of inducing breach of contract.
Issues
The issues in the case were whether the contractual restraints were valid and enforceable and whether Mr Convey had threatened conduct in breach of his obligations.
The judge accepted that the correct contractual interpretation was that Mr Convey could perform the relevant management services outside Australia, BUT he could not work for one of the prohibited companies in the prohibited activities in Australia even if the work related to projects outside Australia. This was a significant interpretation. Likewise, he could not solicit customers throughout the world from Australia, even if they were customers of another group company.
Mr Convey’s role with Incitec Pivot was to develop and deliver its “international” technology licensing and sales strategy. It was accepted this would be similar work to that which he carried out with AECI.
Mr Convey gave evidence that he thought the restraint meant he could not perform an equivalent role in Australia. This threatened breach of the first restraint and so there was a prima facie case established of breach of both relevant restraints.
However, there were difficulties with the contention by the applicant that the first and second restraints did no more than reasonably protect AECI’s legitimate interests in protecting its confidential information and customer connections. The court accepted that the evident purpose of the 2 restraints was to extend the protection sought beyond AECI’s own confidential information and customer connections to those of the broader group as a whole and each member company individually. This is not generally justifiable.
In relation to the first restraint. AECI submitted that confidential information could be carried away in Mr Convey’s head and used if he commenced work for a competitor whereas a restraint would be easier to enforce than a breach of confidence or copyright claim. However, the first restraint extended beyond AECI’s competition and misuse of its own confidential information. It extended into the sphere of competition of other members of the group who engaged in the prohibited classes of activity outside Australia. The court said that, for that to be enforceable, AECI would have to satisfy the court that, at the time the contract was entered into, the nature of Mr Convey’s employment would expose him to their confidential information and formed part of his duty to AECI to protect that information.
The court accepted that there were some arguments in favour of this position. However, the restraint formulation was curious. The difficulty was that Mr Convey could work for Incitec Pivot outside Australia (working on international projects for non AECI customers) without any breach of the restraints and AECI was protected by the general confidential information clause in the contract and deed. This weakened AECI’s case considerably.
In relation to the second restraint, the evidence did not support the conclusion that Mr Convey’s knowledge or influence in relation to clients of other group companies justified the restraint. The court said it was possible that the second restraint might be enforceable without the broader references to group companies but this was not sought by AECI.
The court also took into account that granting the injunction for the first restraint would have the effect of final relief given the 12 month restraint. A strong probability of success was needed in that event.
The court also had to consider the balance of convenience in deciding whether to grant interim injunctive relief to AECI. This involved a consideration of whether the inconvenience or injury likely to be suffered by the applicant if the injunction was refused outweighed that likely to be suffered by the respondent if the injunction were granted. The adequacy of an award of damages was also a consideration.
The first restraint was the focus of this consideration given the finding that there was no prima facie case on the second restraint. Here, AECI was seeking to restrain the opportunity for misuse of confidential information rather than the threat of actual misuse and was prepared to pay 1 years salary for that right (2/3 of which had been paid already). The judge accepted that the loss might be significant and difficult to quantify.
The court did not consider the respondents’ arguments of delay in a revenue stream and of harm to Mr Convey’s employment prospects after the restraint period ended to be persuasive. However, the judge gave weight to the delay of AECI in bringing the proceeding, not filing until 8 June 2020 despite knowing Mr Convey had accepted the employment offer since 13 March.
The court decided to dismiss the application. It also considered that there was no prima facie case for enforcement against Incitec Pivot for the tort of inducing breach of contract.
Take away points
Some points arising out of this case are:
- An employer should carefully consider whether to include other group companies within the contractual restraint clause.
- Payment for the period of restraint is relevant but not always a decisive factor.
- The length of time until a final hearing will be held is relevant to the court’s discretion.
DJRA Pty Ltd v Griffin [2020] QDC 178 (Richards DCJ)
DJRA provided pre insolvency advice and services to businesses and individuals in financial distress with most of its work in South East Queensland, Sydney, Melbourne and surrounding areas. In 2016, it was decided to establish an office in Mackay servicing the Central Queensland area. Mr Griffin was given 6 months training and commenced work in the Mackay office when it opened on 1 February 2017. He resigned on 27 February 2020, almost 3 years later.
DJRA’s business model relied on referrals with a list of 30 “A” level referrers. Despite a contrary statement of intention to the employer, Mr Griffin established his own insolvency advice service in Mackay as a direct competitor and DJRA sought injunctive relief.
The contract of employment restrained Mr Griffin from:
- soliciting anyone who had been a DJRA client in the previous 12 months prior to termination;
- poaching anyone who had been an employee, director, consultant or contractor of DJRA in the 6 months prior to termination; and
- competing with DJRA.
The contractual periods of restraint varied from 1 month to 1 year and in a geographic area ranging from all of Australia to New South Wales, Victoria and Queensland to simply Queensland. DJRA sought an interim injunction to stop Mr Griffin from contacting these active referrers. There was not in dispute that Mr Griffin was working in the same industry or that he had approached referrers.
The court expressed a number of concerns including that:
- referrals were an ad hoc arrangement with no regularity and no contractual obligation;
- the non compete restraint clause did not include referrers and was too wide geographically given Mr Griffin’s work had been in Central Queensland; and
- the restraint being sought was different to the contractual restraint.
It can be inferred that the court accepted that the list of referrers was a generic list of local professionals and not confidential. The court also accepted that granting injunctive relief for 12 months as sought by the plaintiff would effectively destroy Mr Griffin’s business. The court considered that any loss suffered by the plaintiff could be addressed through damages. The court considered that the balance of convenience was with Mr Griffin and the application was dismissed.
Some points arising out of this case are:
- It is important to properly define the persons to whom restraints will apply.
- Some closeness of relationship between the employer and the client/referrer is desirable.
- Geographical restraint options need to be reasonable.
- The court will not re write the restraint.
Australian Timber Supplies Pty Ltd v Welsh [2021] QSC 266 (Freeburn J)
Australian Timber Supplies was engaged in the retail sale of timber products for building use. Mr Welsh commenced employment on 21 August 2017 as a purchasing officer and progressed through several roles to that of category manager and as Acting State Manager Queensland from 31 May 2021. He had a high degree of knowledge of Australian Timber Supplies products and pricing, suppliers and customers.
His contract contained a restraint clause requiring that he not engage in any competing business or approach clients, employees or contractors for 12 months in either Australia, Queensland or within 100km of the Australian Timber Supplies office in Stapylton.
He resigned and gave notice towards the end of July 2021 but his employment was ultimately terminated by the employer on 13 August 2021. He had commenced establishing a new business in November 2019, during his employment with Australian Timber Supplies, including registering a business name and website, creating an Instagram account and some time in July 2021 established a warehouse. This was not disputed.
Australian Timber Supplies sought an injunction to restrain Mr Welsh from operating his new business for 12 months from the day his employment ended on 12 August 2021 within 100kms of Stapylton. Mr Welsh argued that his new business operated in a different market and that he had not misused confidential information.
The court considered that there was a strong prima facie case against Mr Welsh. His conduct in establishing a business when his employment contract required that he not undertake work for any other business without consent was in breach of his contract. Australian Timber Supplies had a legitimate business interest in restricting Mr Welsh from trading in competition after his employment ended using knowledge of customers, suppliers, product and pricing gained at Australian Timber Supplies.
The court accepted that Mr Welsh had a broad range of knowledge from his previous work experience but considered it likely he would exploit knowledge gained from his Australian Timber Supplies employment. The court considered the restrictions to be “relatively modest” in that Mr Welsh was free to conduct his own business anywhere except within 100kms of Stapylton and only for 12 months.
The court considered 12 months to be a reasonably short time frame designed to protect Australian Timber Supplies’ legitimate business interests in the industry of supplying timber products to the building industry.
Australian Timber Supplies also claimed that Mr Welsh had misused confidential information. However, Australian Timber Supplies did not specify the specific confidential information said to have been misused and could not identify that Mr Welsh had taken anything specific from Australian Timber Supplies. However, the court considered that the employer’s difficulty in distinguishing what is general knowledge, skill and experience from what has been acquired in confidence underscored the reasons for and reasonableness of the non compete clause.
The court considered that the similarity in products sold by the 2 businesses meant that Mr Welsh would have had in mind Australian Timber Supplies prices and would know the details of suppliers and some customers. The court was also not satisfied that the 2 businesses operated in distinct markets. Australian Timber Supplies produced evidence comparing each of the products sold by Mr Welsh’s business with those sold by Australian Timber Supplies which showed 54 of 59 products were the same.
The court also took into account Mr Welsh’s evidence that he had identified a gap in the market, which to the court involved inherent recognition that there was only 1 market and it only became clear to Mr Welsh whilst employed by Australian Timber Supplies.
Ultimately the court considered that Australian Timber Supplies had established a strong prima facie case of breach of restraint whilst the existence of a prima facie case of breach of confidentiality was less likely. The court also considered that granting an injunction would not effectively determine the matter as a trial could be held within 12 months.
In considering the balance convenience, the court said it should take whichever course appeared to carry the lower risk of injustice if it should have been wrong in granting an injunction. There was no evidence of the effect a 12 month injunction within a 100km radius of Stapylton would have on Mr Welsh’s business but it was assumed the impact could be significant (although addressed by a damages undertaking given by the employer in the event it failed at a full hearing). On the other hand, the court considered the economic impact to Australian Timber Supplies could be beyond recovery because it would be difficult to detect the extent of Mr Welsh’s competition and use of confidential information.
The court considered the balance of convenience favoured the grant of the injunction.
Some points arising out of this case are:
- It was clear the court was not impressed that Mr Welsh had established his own business whilst still employed by Australian Timber Supplies.
- It is interesting that there was only 1 restraint period to choose from in the contract but the court thought it was reasonable. Twelve months is a significant time frame but the court thought it reasonable to protect the employer’s interests perhaps because of Mr Welsh’s high degree of knowledge of products, supplier and customers. Whilst the court didn’t use this language, it seemed likely that he might be viewed as the face of the company and someone who clients might follow.
- It is interesting to compare the court’s view of a 12 month restraint in this case compared with the previous cases though.
- Confidentiality issues are more difficult where there is no evidence of taking or misuse.
- It was clear that the employer had gone to considerable lengths to demonstrate the cross over between the 2 businesses and this paid dividends at hearing.
All of these cases demonstrate the inherent uncertainty of outcome in litigation and the high stakes which can be involved. These issues need to be considered in contemplating legal action and also by employees considering chancing their arms on breaching their post employment obligations.