FEDERAL COURT OF AUSTRALIA

Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111

THE COURT ORDERS THAT:

1.    The appeal be dismissed; and

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

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

REASONS FOR JUDGMENT

THE COURT:

INTRODUCTION

1    The first respondent to this appeal, HRX Holdings Pty Ltd (HRX), brought proceedings against Mr Pearson, its former employee and the appellant in this Court, to prevent him taking up employment with a competitor. The proceedings were commenced in the Supreme Court of New South Wales but were subsequently cross-vested to this Court pursuant to s 5 of the Jurisdiction of Courts (Cross-vesting) Act 1987 (NSW).

2    HRX’ claim is based upon a clause of its service agreement with Mr Pearson which purports to preclude Mr Pearson from working, in any capacity whatever, in a business or operation that is similar to or competitive with the business of HRX or its subsidiaries for a period of two years after the termination of his employment with HRX.

3    The principal issues before the primary judge were whether the restraint was enforceable against Mr Pearson at common law or by reason of s 4 of the Restraints of Trade Act 1976 (NSW) (Restraints Act). Mr Pearson argued that the restraint was unenforceable at common law, and that the Restraints Act had no relevant operation, both because the restraint was unreasonable, and also because the Fair Work Act 2009 (Cth) (FWA) excluded State legislation from the field by virtue of s 109 of the Commonwealth Constitution (the Constitution).

4    The primary judge concluded that the restraint clause was enforceable against Mr Pearson at common law without need for recourse to the Restraints Act. His Honour also held that, if he was in error in that conclusion, the Restraints Act would operate to produce the same result. In this regard, his Honour held that the Restraints Act was not invalidated by reason of its inconsistency with the FWA.

5    His Honour declared that the restraint clause was binding on Mr Pearson and made orders restraining Mr Pearson in accordance with the terms of that clause. His Honour also noted that Mr Pearson undertook to abide by a non-solicitation clause in the service agreement.

6    Mr Pearson now appeals to this Court, arguing that the restraint is not reasonably necessary to protect any legitimate interest of HRX. In particular, he argues that, given that the restraint prevents Mr Pearson from competing with HRX for two years, anywhere in the world for the business of customers who have never been customers or prospective customers of HRX, and given that Mr Pearson’s contract of employment also contained separate non-solicitation and confidentiality provisions, the restraint is not reasonably necessary to protect any legitimate interest of HRX and is, accordingly, unenforceable at common law.

7    It is not necessary to consider whether the Restraints Act affords HRX a right to relief beyond that available to it at common law. Mr Pearson no longer pursues the contention that the Restraints Act is invalidated by s 109 of the Constitution. Accordingly, it is unnecessary to refer further to this aspect of the case.

8    To facilitate an appreciation of the arguments advanced in this Court, we will first summarise the factual background and the relevant contractual provisions. We will then refer to the primary judge’s Reasons for Judgment (Reasons) before addressing the arguments agitated in this Court.

FACTUAL BACKGROUND

9    The statement of the factual background which follows is taken largely from the findings of the primary judge at Reasons [1]-[18] and [50]-[58]. These findings of fact are not in issue on the appeal. Mr Pearson disputes the legal significance of his Honour’s findings and the sufficiency of his Honour’s legal analysis of the effect of the contractual provisions on which HRX relies to support its claim to injunctive relief.

10    HRX was founded in January 2005 by Katrina Leslie. The trustee of Ms Leslie’s family trust, Cazo Pty Ltd (Cazo), is the major shareholder in HRX. Ms Leslie is the non-executive chair of HRX. Mr Pearson was first employed by HRX in February 2005. Both Ms Leslie and Mr Pearson were active in the establishment and direction of HRX in the human resources business.

11    Mr Pearson first became involved in human resources in Australia in 1995, working for the firm known as Morgan & Banks. Thereafter, for a good deal of his time in the human resources industry, Mr Pearson worked for businesses associated with Mr Morgan and Mr Banks of that firm. At the present time, Mr Banks is the Chairman and Mr Morgan is a non-executive director of Talent2, a company which was established in 2003. Talent2 competes in Australia directly with HRX both generally and for particular clients and contracts. Mr Morgan and Mr Banks also have controlling interests in businesses in the United States of America. It was Mr Pearson’s proposal to take up employment at a senior level with Talent2 that prompted HRX to commence proceedings against Mr Pearson.

12    The nature and extent of HRX’ business are important. HRX offers recruitment process outsourcing and consulting services, human resources outsourcing and recruitment technology to government and private enterprise. It develops techniques, technological systems, facilities and strategies for its clients. Mr Pearson has been an innovator in this area. He was HRX’ primary presenter to prospective clients in its endeavour to secure business. The primary judge said at Reasons [6]:

… He had an intimate knowledge of client relationships, of the techniques and resources used by HRX to sell its services to clients, of the methods by which HRX serviced the contracts which it obtained, and of the strategies with which HRX might attempt to retain a client whose contract was about to expire (generally two to three years after inception).

13    Mr Pearson accepted that he has been a key component of HRX’ success in entering and growing in the small and competitive market in Australia. During Mr Pearson’s time at HRX its policy was to follow clients into business opportunities outside Australia and New Zealand. Although HRX had tendered for work in other areas, at the time of Mr Pearson’s resignation, its only clients were in Australia and New Zealand.

14    During Mr Pearson’s employment with HRX, he had access to all, or virtually all, of HRX’ confidential business information, including the techniques and facilities used by HRX to sell its services and its client retention strategies.

15    From early on in HRX’ business, Mr Pearson and Ms Leslie agreed that it was necessary, in order to protect the interests of HRX, that staff engaged by it be subject to some level of post-employment restraint, as well as obligations of confidentiality, when they left the service of HRX. Prior to the execution of Mr Pearson’s service agreement, he had negotiated with staff on behalf of HRX for restraints for periods of three, six or twelve months depending on the sensitivity of the position of the staff member. In no case did any of those contracts oblige HRX to make payment during the restraint period. Indeed, the evidence disclosed that, except in Mr Pearson’s own case, HRX did not favour the making of payments during a period of post-employment restraint. As will be seen, the position was different in Mr Pearson’s contract.

16    On 14 December 2005, Mr Pearson executed the service agreement governing his employment as Chief Operating Officer of HRX. The service agreement is expressed to operate on and from 14 February 2005. It applied during the whole of Mr Pearson’s employment, which was described by a number of different titles, until his resignation in 2011.

17    Negotiations towards the execution of Mr Pearson’s service agreement began in early August 2005 with a document proffered by Mr Pearson. That document proposed a post-employment restraint upon his carrying on, or having any interest in, a “Restrained Business” for a period of six months. Ms Leslie did not agree with the duration of that restraint. Ms Leslie gave evidence that the need for post-employment restraint upon Mr Pearson involved “one of the biggest risks to the business…”. Negotiations ensued over a period of some months.

18    The terms of the service agreement as finally executed restrain Mr Pearson from accepting employment with, or engaging in a business “similar to or competitive with”, HRX for two years after the termination of employment. Importantly, it also provides for his salary to be paid to him by HRX during all but three months of the restraint period. Further, it provides for Mr Pearson to be allocated an eight per cent shareholding in HRX. Mr Pearson acknowledged in cross-examination that he understood that, if he had not agreed to the restraint, he would not have been allocated these shares.

19    Clause 9 of the service agreement contains obligations concerning confidential information which are expressed to survive the termination of employment. Read with the definition of “Confidential Information”, those obligations require Mr Pearson not to disclose information including policies, procedures, contracts, agreements, affairs, ideas, business plans and developments relating to existing or future business opportunities or business practices as well as all other matters relating to the internal or external operations or plans of companies in the HRX group.

20    The service agreement also contains cl 14.3, a non-solicitation clause, the terms of which we will set out directly below.

21    Mr Pearson decided to leave HRX on 12 August 2011 as a result – so he told HRX’ customers – of his dissatisfaction with management practices. In fact, a week before Mr Pearson resigned from HRX, Talent2 had offered him the position of General Manager – Global Head of Business Development for its Recruitment Management Services which he had accepted.

22    Mr Pearson gave two months’ written notice of his resignation from the employment of HRX on 29 September 2011. Mr Pearson proposed, unless restrained, to work as one of Talent2’s senior executives in direct competition to HRX in Australia. It was proposed that Mr Pearson would continue to live in Sydney while working as one of Talent2’s most senior executives. He would report and be responsible to the executive of Talent2 who, though based in Hong Kong, directs business in competition with HRX. Thus Mr Pearson would supervise and lead Talent2’s employees who compete with HRX in Australia.

THE SERVICE AGREEMENT

23    Clause 14 of the service agreement contains cl 14.4 which is the restraint the subject of this appeal. It is necessary to set out in full the terms of cl 14:

14.1    Acknowledgment

The Executive acknowledges to the Company that he:

(a)    has an intimate interest in the contacts, clients, knowledge and management of the Company’s business;

(b)    has obtained specific employment legal advice in relation to this agreement, including without limitation the restraints contained in this clause 14;

(c)    has and will receive consideration for his obligations under this clause, including the HRX Shares which will be granted to the Executive without cost to him;

(d)    would detrimentally affect the Company’s legitimate interests by breaching his obligations under this clause; and

(e)    pursuant to paragraph (a) believes the restraints contained in this clause 14 are reasonable, in context of the Employment, the industry and the period and geographic nature of the restraints, to protect the goodwill of the Company’s business.

14.2    Certain conduct prohibited during the Employment

The Executive must not during the Employment, do any of the following things without first getting the consent of the Board:

(a)    business activities: directly or indirectly carry on a Restrained Business, alone or in partnership or joint venture, with anyone else;

(b)    no interest: subject to clause 14.6, directly or indirectly be concerned with or interested in a Restrained Business in any capacity, including as principal, agent, partner, joint venturer, shareholder, unit holder, employee, director, trustee, beneficiary, manager, consultant, adviser or financier; or

(c)    payment: accept any payment or other benefit in money or in kind from any person as an inducement or reward for any act or forbearance or in connection with any matter or business transacted by or on behalf of the Company.

14.3    Non-solicitation

The Executive must not and must not counsel, procure or otherwise assist any person or entity to do any of the following during the Restraint Period:

(a)    customers: solicit or persuade a Customer to stop or reduce its business with the Company or its Related Bodies Corporate;

(b)    employment: induce or attempt to induce an employee or contractor of the Company to terminate his or her employment or consulting relationship with the Company;

(c)    suppliers: solicit or persuade a supplier to stop or reduce its business with the Company or its Related Bodies Corporate.

14.4    Restraint Period obligations

(a)    The Executive must not and must not counsel, procure or otherwise assist any person or entity to do any of the following things during the Restraint Period:

(i)    no competition: directly or indirectly carry on a Restrained Business, alone or in partnership or joint venture with anyone else;

(ii)    no interest: subject to clause 14.6, directly or indirectly be concerned with or interested in a Restrained Business in any capacity including as principal, agent, partner, joint venturer, shareholder, unit holder, employee, director, trustee, beneficiary, manager, consultant, adviser or financier.

(b)    In further consideration of the Restraint Period under this sub-clause, the Company will pay the Executive the average monthly Remuneration Package which he received during the two years before the Termination Date or during the Employment if employed for less than 2 years, for each month of the Restraint Period, except the first 3 months of the Restraint which will be unpaid, provided that:

(i)    If Pearson leaves voluntarily within 2 years any amounts payable or paid by the Company in respect of the Restraint Period are reduced by any alternative remuneration or income received or receivable by the Executive, including proceeds from any sale of the HRX Shares;

(ii)    If Pearson does not voluntarily leave within 2 years then any amounts payable by the Company in respect of the Restraint Period are reduced by any alternative remuneration or income received or receivable by the Executive, including proceeds from any sale of the HRX Shares on the following schedule:

•    If proceeds from any sale of HRX shares is less than $500,000 then there is no reduction for the sale of HRX shares

•    If the sale of HRX shares is more than $500,000 but less than $1,000,000 then the amount owing under the Restraint will be reduced by 50%

•    If the sale of HRX shares is $1,000,000 or more, then clause (i) applies (i.e. amounts payable are reduced by any alternative remuneration or income received or receivable by the Executive, including proceeds from any sale of the HRX Shares.

(iii)    the Executive must immediately refund to the Company any payments made which exceed what the Executive is otherwise entitled to be paid under this sub-clause, whether or not a demand has been made by the Company to do so;

(iv)    the Executive must use his best endeavours to obtain alternative employment commensurate with his skills and experience;

(v)    the Executive must provide the Company with any information it requests or answer any questions arising from or in connection with his employment, remuneration and income following the Termination Date;

(vi)    the Executive must immediately inform the Company if he accepts an offer of employment and provide the Company with particulars of his remuneration in respect of that employment; and

(vii)    the Executive is not entitled to any payment in respect of the Restraint Period if the Company waives the Executive’s obligations under this clause 14.4. within 14 days post termination.

14.5    Separate undertakings

If any part of an undertaking in clause 14.2 is unenforceable, it may be severed without affecting the enforceability of the rest of that undertaking or the other undertakings.

14.6    Listed securities

Nothing in this clause 14 prevents the Executive or the Executive’s nominee holding 5% or less of the issued shares or units of a body corporate or a unit trust listed on a stock exchange.

14.7    Survival

The Executive’s obligations under this clause survive the termination of the Employment.

24    The constraints in clause 14.4 are expressed by reference to the defined term, “Restrained Business” in cl 1 of the service agreement. That definition is as follows:

Restrained Business means a business or operation similar to or competitive with the business of a Group Company, including without limitation a business involved in the outsourcing of recruitment services (often referred to as Onsite or Recruitment Process Outsourcing) or any other HR Outsourcing areas that HRX is operating in at the time of leaving the company.

25    The term “Restraint Period” is defined in cl 1 of the service agreement to mean “2 years from the Termination Date”.

26    The definition of “Customer” in cl 1 is as follows:

Customer means:

(a)    a customer or client of the Company or its related bodies corporate who was a:

(i)    customer or client of the Company or its related bodies corporate at any time in the 12 months prior to the termination of the Employment; and

(ii)    person or entity who entered into negotiations with the Company or its related bodies corporate with a view to receiving products or services from the Company at any time in the 6 months prior to the termination of the Employment; and

(b)    a prospective customer or client of the Company or its Related Bodies Corporate to whom a Group Company has presented their services or have solicited business from in the 12 months prior to termination of the Employment.

THE REASONS OF THE PRIMARY JUDGE

27    It may be noted that, at trial, Mr Pearson gave an undertaking to the Court that he would abide by cll 14.3(a) and 14.3(b) of the service agreement. He also accepted that he is bound by cl 9 of the service agreement in relation to confidential information.

28    The issue of construction agitated at trial focused upon the definition of the term “Restrained Business”. HRX argued that the words “similar to” did not add to the words “competitive with” and therefore could be ignored or “blue-pencilled”. Mr Pearson argued that the two phrases were true alternatives, and that the words “similar to” were not subject to any stated geographical limitation. On this construction, the restraint would be impermissibly wide because the restraint would apply to any engagement by or involvement with any business akin to HRX anywhere in the world, whether a competitor (or potential competitor) of HRX or not. Mr Pearson argued that the words “similar to” were not capable of being read out of the definition because they were an integral, operative part of the provision.

29    On the issue of the enforceability of the restraint, Mr Pearson contended that the obligations concerning non-solicitation and confidential information were sufficient to provide adequate protection to HRX so that any further restraint was unreasonable because the further restraint was not necessary to protect a legitimate interest of HRX, such as the confidentiality of its business affairs or the goodwill of its clientele.

30    In relation to both the construction of the restraint and its reasonableness, the primary judge described the following circumstances as significant:

1.    HRX had a well developed policy, with which Mr Pearson was familiar, of insisting upon post-employment restraints on its executives;

2.    The restraints acknowledged Mr Pearson’s intimate interest in the contacts, clients, knowledge and management of HRX’ business; an acknowledgement which the evidence clearly confirmed, with respect to the period both before and after execution of the contract;

3.    Before the service agreement was executed, no executive had had a contract of employment which provided for any payment during a period of post-employment restraint;

4.    HRX and Mr Pearson had agreed, without the necessity for negotiation, on the terms of the definition of “Restrained Business”;

5.    The HRX shares, issued to Mr Pearson at no cost to him, were agreed to represent specific consideration for the restraints in cl 14. There were reductions envisaged upon realisation of Mr Pearson’s HRX shares, but in no case would such a reduction reduce Mr Pearson’s total remuneration below its pre-existing level and in every case there would be potentially a substantial additional amount which remained payable;

6.    The parties had expressly agreed that payment during the restraint period at a level which could not be less than the prior average monthly remuneration (calculated over the preceding two years) would be specific consideration for the duration of the restraint;

7.    The question of the duration of the restraint was the subject of close negotiation. In that connection, the accompanying arrangements for payment for all but three months of the period were unusual – indeed unique – within HRX at that time;

8.    Mr Pearson had the opportunity to take accounting and legal advice in relation to the service agreement and did so (indeed, we would add that Mr Pearson’s legal advice was that the proposed restraint period of two years was “excessive and likely to be unenforceable and offensive to the Restraint of Trade Act 1996 [sic]”, but that he should “leave this in”);

9.    The final terms of the service agreement, and the restraints in particular, had been negotiated in detail (where in issue) over some months;

10.    The parties expressly accepted in their contract that the restraints, including the period of the restraints, were reasonable.

The construction issue

31    The primary judge held that the words “similar to” and “competitive with” are not entirely disjunctive but are intended to refer to aspects of the same concept. On this view, a restrained business is one which is potentially or actually in competition with HRX’ business at the time of termination of employment. The primary judge held that, while this market may not necessarily be confined to Australia, it is sufficiently narrow to exclude the notion of an unlimited global restraint. His Honour reached this conclusion for several reasons.

32    First, the definition must be read as an aid to construction of the restraint in cl 14.4 of the service agreement. Clause 14 must be read in the overall context of the service agreement having regard to the purpose of cl 14 itself and construed in a way that is consistent with that purpose. The evident purpose of cl 14 is to protect HRX’ legitimate interests rather than unnecessarily to restrain the future activities of Mr Pearson after the termination of his employment. Construed in this way, the definition means a business which might pose a real commercial threat to HRX if it had the benefit of Mr Pearson’s intimate knowledge.

33    Secondly, the primary judge held that the definition of “Restrained Business” is self-limiting, in that it was only intended to restrain Mr Pearson in areas of business in which HRX was actually operating at the time the executive left its employ.

34    Thirdly, not long before the execution of the service agreement, HRX by its agent, Mr Pearson, had agreed to excise the words “similar to” from an otherwise identical version of the same agreement for a prospective executive. The primary judge held that this was a clear indication, as an objective surrounding circumstance, that those words were not seen (or intended) to add materially to the words “competitive with”.

Reasonableness of the restraint

35    The extent of the negotiations between the parties was regarded by the primary judge as an indication of the deliberate character of the execution of the service agreement which could be attributed to both parties.

36    The primary judge held that the restraint in cl 14.4 of the service agreement was reasonable. The restraint was the subject of specific negotiation; it was the subject of separate consideration in the form of payments; it was the only restraint at the time to be accompanied by payment; and it reasonably accommodated the contractual cycle on which HRX operates, its clients typically entering into two to three year contracts. The fact that Mr Pearson was to be paid at least at the level he enjoyed while at HRX for the balance of the restraint period represented a significant amelioration of any financial disadvantage to him; it directly affected the objective assessment of the reasonableness of the restraint.

37    The primary judge addressed the argument that HRX had no legitimate interest to support the restraint. His Honour said at Reasons [58]-[59]:

Mr Pearson argued that he could not be restrained simply from competing with HRX if the restraint was not necessary to actually protect a legitimate business interest of HRX, such as confidentiality. However, the position is not as simple and straightforward as that. Mr Pearson was in a unique position. He was in that position because he was, for most customers, the “human face” of HRX, who represented HRX to the customer, at least during the introduction and selling phase until a commitment was made, after which more mundane matters such as contract documentation could be attended to. An employer is “entitled to be protected against unfair competition based on the use by the employee after termination of employment of the customer connection which the employee has built up during the employment” (see Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9 at [25] and the cases there cited).

I am satisfied that, apart from Talent2, Mr Pearson should also be restrained from working for other businesses which compete with HRX in Australia. It is not necessary to wait until Mr Pearson attempts to make some form of arrangement with such a business. Similar considerations apply to the possibility that Mr Pearson may, within the restraint period, offer his services as a consultant in competition with, or in the same area of operations as, HRX in Australia or New Zealand. During a round of communications with HRX customers in December 2011, after his employment was over, Mr Pearson let it be known that he proposed to engage in consulting. In my view, the evidence shows that what he proposed would be in breach of the restraints and HRX has a legitimate interest in preventing him from doing so.

38    We turn now to summarise and consider the arguments advanced by the parties in this Court.

MR PEARSON’S SUBMISSIONS

39    Mr Pearson contends that the primary judge erred in failing to adhere to a two-step test which requires, first, the identification of the interest to be protected by the restraint, and then consideration of whether the restraint is no more than reasonable for the protection of that interest. Mr Pearson contends that the circumstances relied on by the primary judge served to distract from this two-step process. For example, the primary judge, in concluding that the two year time period was “not unreasonable”, erred in failing first to consider what legitimate interest of HRX was to be protected by such a restraint.

40    The thrust of the argument agitated on Mr Pearson’s behalf is that the primary judge erred in failing to appreciate that any legitimate interest of HRX, in protecting itself from competition by Mr Pearson after the termination of his employment, was adequately protected by the non-solicitation provision in cl 14.3 and the confidentiality provision in cl 9 such that the extra protection afforded by cl 14.4, unconfined by geographical limitation, was unnecessary and unreasonable. On behalf of Mr Pearson, reference was made inter alia to Stenhouse Australia Ltd v Phillips [1974] AC 391 at 403; Smith v Ryngiel [1988] 1 QdR 179 at 186; and Stacks Taree v Marshall [No 2] [2010] NSWSC 77 at [64].

HRX’ SUBMISSIONS

41    HRX contends that, on the primary judge’s unchallenged findings of fact as to Mr Pearson’s customer connections and his role within HRX’ business, his Honour was correct to conclude that the restraint was reasonably necessary to protect HRX’ legitimate business interests.

42    HRX makes the point that the non-solicitation clause might well have been insufficient to protect its interest in preserving its customer connections against the risk of customer movement from it to Mr Pearson. Without the restraint in cl 14.4, Mr Pearson would be able to take employment in the division of Talent2 which is HRX’ direct competitor and former customers of HRX might gravitate to that division with new business. This outcome would not be prevented by the non-solicitation clause. This risk to HRX’ business of Mr Pearson’s involvement as an employee of a competitor was particularly significant given the centrality of Mr Pearson’s role as the “human face” of HRX in its dealings with customers and in the pursuit of new business.

CONSIDERATION

43    In this Court, Mr Pearson did not seek to challenge the primary judge’s construction of cl 14.4. We respectfully regard his Honour’s view as correct. In this regard, the phrase “similar to or competitive with” refers to a “business or operation” of a company in the HRX group. The “similarity” postulated by this phrase is not concerned with points of comparison other than in respect of the business operations of HRX and its putative competitor in relation to sources of demand for their services. On this view, the phrase “a business or operation similar to or competitive with the business of” HRX or its associated companies is a composite expression encompassing business operations which were either actually competitive with HRX or potentially so by reason of their similarity to HRX’ business at the time of termination of Mr Pearson’s employment.

44    In addition to the three reasons given by the primary judge for this construction (which are set out in [32]-[34] above and with which we agree), reference might also be made in support of that construction to cl 14.1(e) of the service agreement, which contains an express reference to “the geographic nature of the restraints”. This provides further contextual support for the primary judge’s construction of cl 14.4 and his Honour’s rejection of Mr Pearson’s contention that the restraint was universal.

45    While the drafting of the definition is not as clear as it might have been, a construction which will preserve the validity of the contract is to be preferred to one which will make it void: Mills v Dunham [1891] 1 Ch 576 at 589 - 590.

46    HRX had an evident interest in preserving the customer connections which are the source of its income. It is well established that an employer’s customer connection is a legitimate business interest which can support a reasonable restraint of trade where the employee in question controls the employer’s customer connections (see, for example, Jardin v Metcash Limited (2011) 285 ALR 677 at [91], [95] and [97] per Meagher JA (with whom Young JA agreed) and more generally Heydon JD, The Restraint of Trade Doctrine (3rd ed, Lexis Nexus Butterworths, 2008) p 121-129).

47    In Elsley v J.G. Collins Insurance Agencies Limited [1978] 2 SCR 916 at 925-928, Dickson J delivering the judgment in the Supreme Court of Canada of Laskin CJ, Martland, Ritchie, Pigeon, Beetz, Pratte JJ and himself said in a passage which, though lengthy, deserves citation in full:

…Whether a restriction is reasonably required for the protection of the covenantee can only be decided by considering the nature of the covenantee’s business and the nature and character of the employment. Admittedly, an employer could not have a proprietary interest in people who were not actual or potential customers. Nevertheless, in exceptional cases, of which I think this is one, the nature of the employment may justify a covenant prohibiting an employee not only from soliciting customers, but also from establishing his own business or working for others so as to be likely to appropriate the employer’s trade connection through his acquaintance with the employer’s customers. This may indeed be the only effective covenant to protect the proprietary interest of the employer. A simple non-solicitation clause would not suffice.

There are cases which uphold the validity of a covenant prohibiting an employee from engaging in a particular type of work within a specified area, and for an acceptable period of time after the termination of his employment: see e.g. Fitch v. Dewes [1921] 2 AC 158; Marion White v. Francis [1972] 1 WLR 1423; P.C.O. Services Ltd. v. Rumleski [1963] 2 OR 62; Campbell, Imrie and Shankland v. Park [1954] 2 DLR 170. In each of these cases the employee was in a position where he acquired a close personal acquaintance with the clients or customers of the business. Such a restrictive covenant was reasonable, in the words of Lord Birkenhead in Fitch v. Dewes [1921] 2 AC 158 at p. 165, in order that the employee “should not be in a position to use the intimacies and knowledge which he had acquired in the course of his employment in order to create a practice of his own in that same place and by doing so undermine the business and the connection of the [employer].” In the present case, when the clause was drafted it was known that Elsley had, or would acquire, a special and intimate knowledge of the customers of his prospective employer and the means of influence over them.

In the leading case of Morris v. Saxelby [1916] 1 AC 688 Lord Parker enunciated with clarity the circumstances in which a covenant taken by an employer from an employee or apprentice will be enforceable. He said, at p. 709:

Wherever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilize information confidentially obtained.

It is difficult to envisage a factual situation in which an employee would be in a better position than that of Elsley in the present case, to obtain “personal knowledge of and influence over the customers of his employer.” Later in his speech, Lord Parker made the point that it is of importance: whether “the defendant ever came into personal contact with the plaintiff’s customers.” The same point is made in the following passage from Cheshire & Fifoot, The Law of Contract (8th ed.), at p. 369:

A restraint is not valid unless the nature of employment is such that customers will either learn to rely upon the skill or judgment of the servant or will deal with him directly and personally to the virtual exclusion of the master, with the result that he will probably gain their custom if he sets up business on his own account.

In the view which I take of this case a covenant against solicitation would not have been adequate to protect the proprietary interest entitled to protection … Elsley testified that he did not solicit former clients; notwithstanding, two hundred clients switched their custom to him. That is a vivid illustration of what Lord Parker had in mind in speaking of the influence of an employee over the customers of his employer … As Salter J. said in the case of Putsman v. Taylor [1927] 1 SCR 319 at p. 642, a covenant against solicitation “is difficult to enforce; it is difficult to show breach and difficult to frame an injunction.” The difficulty is demonstrated in this case. Does an advertisement which comes to the attention of former clients amount to solicitation? Was there solicitation by Elsley? I need not attempt to answer those questions. The point is that a non-solicitation covenant, in the circumstances here found, would have been meaningless.

48    It is apparent from the factual findings of the primary judge that Mr Pearson’s position of influence over HRX’ customers is no less strong than that evidently enjoyed by Mr Elsley.

49    In Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9 at [25] Brereton J explained an employer’s legitimate interest in the protection of its customer connections. His Honour said:

It is plain that an employer's customer connection is an interest which can support a reasonable restraint of trade: Hitchcock v Coker (1837) 6 Ad & El 438 at 454, [1835–42] All ER Rep 452 at 456–457 (Tindal CJ); Herbert Morris Ltd v Saxelby (at 709); Dewes v Fitch [1920] 2 Ch 159 at 181; Coote v Sproule (1929) 29 SR (NSW) 578 at 580, 46 WN (NSW) 180 at 181 (Harvey CJ in Eq); Lindner v Murdock's Garage (at 633–634) (Latham CJ, Webb J agreeing), (at 650) (Fullagar J), (at 654) (Kitto J); and Koops Martin Financial Services Pty Ltd v Reeves (at [29]–[33]). Such a restraint is legitimate if the employee has become, vis-à-vis the client, the “human face”of the business, namely the person who represents the business to the customer — or, as it was put by Hoover J in Arthur Murray Dance Studios of Cleveland Inc v Witter (1952) 105 NE (2d) 685 at 706 (Ohio): “The personal relation between the employee and the customer [is] such as to enable the employee to control the customer's business.” (And see Twenty-First Australia Inc v Shade (Young J, 31 July 1998, unreported) at 12; Koops Martin Financial Services Pty Ltd v Reeves (at [34]).) While the employer is not entitled to be protected against mere competition by a former employee, the employer is entitled to be protected against unfair competition based on the use by the employee after termination of employment of the customer connection which the employee has built up during the employment — which, because the employee has in effect represented the employer from the customer's perspective during the employment, might at least temporarily appear attached to the employee, but in truth belongs to the employer: Koops Martin Financial Services Pty Ltd v Reeves (at [30]).

50    It is significant that none of the authorities cited by Mr Pearson was concerned with an employment relationship in which the principal function of the employee in question was the actual development and retention of the customer base and the pursuit of new business on behalf of the employer.

51    In our respectful opinion, HRX’ interest in protecting its customer connections was sufficient to justify HRX’ bargaining for protection against the risk that the personal contacts made by Mr Pearson in the course of HRX’ business would follow him unbidden to a new employer. That interest went beyond HRX’ interest in confidential information and would not sufficiently be protected by the confidentiality provision of the service agreement. And the non-solicitation provision would not have protected HRX from the risk that its customers, knowing of Mr Pearson’s move to Talent2, would choose to move their business to Talent2 unbidden by Mr Pearson and without even discussing the move with him. Further, the non-solicitation clause would be engaged only if there were a reduction in HRX’ business: if an existing customer took new business to Talent2 upon an invitation from Mr Pearson, that conduct would not be caught by the non-solicitation clause. Finally, the non-solicitation clause might not provide practical protection to HRX if HRX did not become aware of a breach.

52    It has been recognised that a confidentiality clause may not afford adequate practical protection to an employer’s interests in preserving trade secrets. In Woolworths Ltd v Olson [2004] NSWCA 372, a restraint on subsequent employment was held to be justified by the need to protect a valuable trade secret. Mason P (with whom McColl and Bryson JJA relevantly agreed) said at [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).

53    As Dickson J noted in Elsley, the protection afforded by the non-solicitation and confidentiality provisions is unlikely to be perfect given the difficulties of proof of breach. In Lindner v Murdock’s Garage (1950) 83 CLR 628, Latham CJ also observed at 636-7 that an employer’s interest in customer connections may not be sufficiently protected by a covenant against solicitation and that a covenant against competition may be a more reasonable form of protection as

… a covenant against solicitation … is difficult to enforce; it is difficult to show breach and difficult to frame an injunction. The master is entitled to protect himself by a covenant against competition [637].

54    It is not in the least fanciful to regard the non-solicitation clause here as an inadequate protection for HRX. In concluding that an injunction to enforce the terms of the restraint was appropriate, the primary judge referred at Reasons [56] to an email sent by Mr Pearson to an existing client of HRX on 12 December 2011. It said relevantly:

I cannot solicit your business … but I believe you can solicit my services if you know what I mean.

55    In this Court, Senior Counsel for Mr Pearson made the unedifying submission that the sending of this email was indeed a breach of the non-solicitation clause by his client; yet that HRX was sufficiently protected by its terms because Mr Pearson undertook to abide by them. It is, no doubt, correct that the sending of this email was a breach of the non-solicitation clause; but to acknowledge that now is a cold comfort to HRX. Had this litigation not been commenced by HRX, it might never have known of this communication.

56    It follows from what we have said that we would reject Mr Pearson’s argument that there was no legitimate interest of HRX which might support the restraint in cl 14.4 of the service agreement.

57    Additionally, it seems to us that HRX’ legitimate interests were not confined to the protection of its customer connections as they existed at the time of Mr Pearson’s departure from HRX’ employment. HRX had a legitimate interest in obtaining the full benefit of its bargain with Mr Pearson while he was employed by it so as to maximise the extent of customer connections made during the term of his employment. A contracting party’s interest in obtaining the benefit of its bargain is implicit in any contract: Mackay v Dick (1881) 6 App Cas 251 at 263; Butt v M’Donald (1896) 7 QLJ 68 at 70-71; and Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 606-607.

58    There are two aspects of HRX’ interest in securing the benefit of its bargain which are relevant here. The first is the preservation of the value of the goodwill generated for HRX by Mr Pearson during the term of his employment which we have already discussed. As we have said, that interest would not be adequately protected by the non-solicitation provision if Mr Pearson were subsequently to take up employment with a firm to which HRX’ customers might be disposed to bring new business without even discussing the move with him.

59    The second aspect of HRX’ interest in having the benefit of its bargain is its interest in the expansion of its business while Mr Pearson was employed by it. That this was a real interest is confirmed by the shareholding arrangement with Mr Pearson. This arrangement provided him with an incentive to ensure the energetic pursuit by him of all potential customers, wherever they be located, if they could be serviced by HRX. The restraint clause, like this incentive, served the legitimate interest of HRX in the expansion of its business by ensuring that Mr Pearson would not, with an eye on the non-solicitation provision and a lively appreciation of the real possibility of a future for himself in business independent of HRX, “hang back” from the diligent pursuit of all potential customers.

60    In Koops Martin v Dean Reeves [2006] NSWSC 449 Brereton J acknowledged the legitimacy of a contractual stipulation to remove the temptation to refrain from the wholehearted pursuit of the target market. His Honour said at [43]-[44]:

The position so far as concerns personal connections may I think be summarised as follows. First, the mere fact that the employee has friends or relations amongst, or makes friends with, customers of his employer, is not a sufficient connection to support a restraint. Secondly, however, if the employee in the course of employment gains special knowledge of or influence over the employer’s customers, such as would give the employee an unfair advantage in competition, that will support a restraint, even if the customers include persons who are or have become the employee’s friends or acquaintances.

A more robust view is taken where the employee’s role includes obtaining and extending custom for the employer’s business. When an employee’s duty includes to build up the employer’s clientele as well as to deal with existing clients, a wide restraint is more likely to be upheld, because in such circumstances the employer is entitled to protection against the employee taking advantage of the period of service to prepare for later competition [G W Plowman & Sons Limited v Ash [1964] 1 WLR 568; [1964] 2 All ER 10; Normalec Limited v Britton [1983] 9 FSR 318, 324; Dean, The Law of Trade Secrets, 2nd edn, [11.150]. In such a case, the establishment of a customer connection is not merely incidental to the employment, but its purpose. In that context, a covenant is considered reasonable, first, to remove the temptation that by cultivation of the target market during employment, the employee may prepare the ground for its exploitation by himself after the employment ends, rather than for his employer during the employment; and, secondly, to prevent exploitation after termination of the employment by the employee of a connection with the customer which the employer has paid the employee to establish for the employer’s benefit. In this context in particular, the fact that in pursuance of his or her obligations under the employment contract an employee has for reward introduced customers who include relatives, friends and acquaintances does not [absent specific agreement to the contrary: see Sharah v Healey [1982] 2 NSWLR 223] remove or cut away the basis which would otherwise exist for a restraint. (Emphasis added.)

61    We turn now to consider whether the restraint was a reasonable manner of protection for HRX’ interests.

62    Where a contractual restraint protects a legitimate interest of the covenantee the restraint must afford no more than reasonable protection as between the parties, and in terms of the public interest. In our respectful opinion, in terms of HRX’ interests, both in protecting its customer connections and in ensuring the diligent and faithful pursuit by Mr Pearson of business opportunities for HRX, cl 14.4 is, as between the parties, reasonably necessary to protect those interests.

63    The benefits secured to Mr Pearson under his contract of employment included an entitlement to shares. As he acknowledged, this entitlement was a quid pro quo for the protection of HRX against the risks involved in its dependence on his faithful and diligent performance of his crucial role in the business of HRX. The allocation of shares to Mr Pearson and the provision for payment for 21 of the 24 months of the restraint period confirm that the restraint was an aspect of a reasonable commercial arrangement as between the parties. In return for the restriction on Mr Pearson’s career, he bargained successfully for a stake in HRX’ business; a benefit which he acknowledged in cross-examination he would not have received had he not agreed to the restraint. There is no reason to think that there was any inequality of bargaining power in the negotiations which led to this arrangement. Indeed, Mr Pearson’s prominence in his field was such that he might be said to have held the upper hand in the negotiations with Ms Leslie. In this regard, he was the first employee to negotiate a provision for payment by HRX during the period of his post-employment restraint.

64    The nature of the business in which HRX, Talent2 and Mr Pearson are engaged is such that the needs of customers, located in, say, Hong Kong, can be met by services provided or arranged by persons physically located in Australia. The geographical limitations on restraints on competition which have been the focus of attention in the authorities have little relevance in the assessment of the reasonableness of the geographic operation of the restraint in question. It is to be noted that cl 14.4 does not operate by reference to particular markets; rather, as Senior Counsel for HRX emphasised, conduct on Mr Pearson’s part which occurs in Australia may have ramifications adverse to HRX’ ability to provide services to existing customers who embark on overseas ventures or to overseas branches of existing customers.

65    The two-year restraint also reasonably accommodates the contractual cycle on which HRX operates. It thus affords HRX the opportunity to effect a renewal of its contracts with customers without the risk that the customer will choose to “stay” with Mr Pearson as the individual with whom it is familiar.

66    No separate argument was advanced by Mr Pearson to the effect that cl 14.4 was unreasonable so far as the public interest is concerned. In this regard, there is no reason to apprehend that cl 14.4 was not reasonably in the public interest. There is no reason to apprehend harm to the public interest in the ready availability of human resources recruitment services in Australia. The evidence is that the industry is competitive; the absence of Mr Pearson from the industry for two years is not likely to change that state of affairs.

67    It is also, we think, relevant to acknowledge that HRX was potentially a competitor in an international market for human resources recruitment services. Given the nature of the business of human resource recruitment, there appears to be no geographic barriers to the recognition of such a market. The public interest is actually enhanced by arrangements which promote the expansion of Australian business overseas, and the engagement of Mr Pearson on terms which ensured his diligent pursuit of such business on behalf of his employer in such an arrangement.

CONCLUSION AND ORDERS

68    For these reasons, the arguments advanced by Mr Pearson should be rejected.

69    The appeal should be dismissed. We consider that Mr Pearson should pay HRX’ costs to be taxed unless earlier agreed.

Associate:

Dated:    17 August 2012