FEDERAL COURT OF AUSTRALIA

Prescott Securities Limited v Gobbett (No 2) [2017] FCA 81

ORDERS

THE COURT ORDERS THAT:

1.    The Plaintiff’s interlocutory application filed on 19 December 2016 seeking certain issues arising in the proceeding to be heard and determined as separate questions is dismissed.

2.    Any matters arising from today’s Judgment will be addressed at the directions hearing at 9 am on Friday, 7 April 2017.

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

REASONS FOR JUDGMENT

WHITE J:

1    This is a decision on the application by the plaintiff (Prescott Securities) for an order pursuant to r 30.01 of the Federal Court Rules 2011 (Cth) (the FCR) for certain issues in the proceedings to be heard and determined in advance of others.

2    In the ex tempore judgment delivered on 31 January 2017, I set out some detail concerning the issues giving rise to the proceedings: Prescott Securities Limited v Gobbett [2017] FCA 74. It is convenient to repeat some of that detail in order to provide the setting for the present judgment.

3    Prescott Securities conducts business as a financial advisor and sharebroker.

4    Between 1 September 1999 and 30 April 2015, the defendant (Mr Gobbett) was an employee of Prescott Securities and, for a period, its Managing Director. He is now an employee of Baillieu Holst Ltd, a provider of financial and stockbroking services in competition with Prescott Securities. By his defence, Mr Gobbett pleads that he commenced that employment on 9 July 2015, that is, just over two months after the cessation of his employment with Prescott Securities.

5    In late October 2014, Mr Gobbett gave Prescott Securities six months’ notice of his intention to terminate his contract of employment. Subsequently, on 5 December 2014, Prescott Securities and Mr Gobbett executed a Deed of Separation (the Deed). The recitals to the Deed recorded that Prescott Securities and Mr Gobbett had, given Mr Gobbett’s notice of termination, reached agreement about the arrangements which were to apply to his separation from Prescott Securities and about related matters. The Deed provided, relevantly, that Mr Gobbett’s employment with the company would terminate on 30 April 2015 (cl 2.1); that from 1 January 2015 to 30 April 2015, Mr Gobbett would, in effect, be on gardening leave (cl 2.2(b)); that the terms of the Deed did not detract from any obligation Mr Gobbett had under his Employment Contract dated 4 December 2013 (cl 10); and, in cl 13, that the Deed constituted the entire agreement between the parties in connection with its “subject matter” and superseded all previous agreements and understandings between the parties in connection with its “subject matter”.

6    In these proceedings, Prescott Securities seeks pecuniary relief of two kinds: damages in respect of an alleged breach by Mr Gobbett of a covenant in his contract of employment concerning his activities subsequent to the cessation of his employment (referred to by Prescott Securities as the “Restrictive Covenant”) and compensation pursuant to s 1317H of the Corporations Act 2001 (Cth) for an alleged breach of the duty imposed by s 183(1) of the Corporations Act.

7    In addition, Prescott Securities seeks a declaration that the Restrictive Covenant, contained in cl 19 and in cl 3.1 to Sch 2 of Mr Gobbett’s written Contract of Employment dated 1 August 2013, is an enforceable post-employment covenant and restraint of trade; a declaration that the Restrictive Covenant has the effect that Mr Gobbett was restrained on and from 1 May 2015 for a period of 12 months from engaging in any of the conduct prescribed in the Restrictive Covenant; and a declaration that Mr Gobbett had, by his conduct in contacting and communicating with certain of its clients in that 12 month period and then subsequently performing professional services for them, breached the Restrictive Covenant.

8    The restraint period is defined in the employment contract in a cascading style as 12 months, nine months, six months or three months.

9    By his amended defence, Mr Gobbett pleads that his employment contract was “superseded and terminated by the [separation] Deed” ([28.1]). Mr Gobbett refers particularly in this respect to the entire agreement covenant in cl 13.

10    Mr Gobbett also challenges the enforceability of the Restrictive Covenant on other bases. First, he contends that the cascading way in which the restraint period is defined means that it is void for uncertainty. Secondly, and in the alternative, he pleads that the Restrictive Covenant is void and unenforceable to the extent that it exceeds three months, alternatively six months, from his commencement of gardening leave on 1 January 2015 or, alternatively, to the extent that it exceeds the periods of three months or six months from the date of cessation of his employment, being 30 April 2015.

11    Prescott Securities seeks to have the following questions (collectively, the Separate Questions) heard and determined in advance of the remaining issues in the trial:

(a)    Whether the Deed of Separation between the Plaintiff and the Defendant dated 5 December 2014 supersedes and terminates the Defendant’s contract of employment dated 4 December [2013] (“Second Contract”), inclusive of the restrictive covenant contained in clause 19 and clause 3.1(a), (b), (d), (e) and (f) of Schedule 2 (“Restrictive Covenants”)

(b)    Whether, as at the date of entering into the Second Contract:

(i)    any Restraint Period forming part of the Restrictive Covenant was unreasonable in reference to the legitimate interests of the Plaintiff because any such period went beyond the adequate protection necessary to protect those interests?

(ii)    the purported restriction n clause 3.1(b) of Schedule 2 of the Second Contract, that the Defendant not undertake or perform for a client work of a kind which involves the provision of services which are, in whole or in part, the same as or similar to the services provided by the Plaintiff or any “Group Company”, is unreasonably and unduly wide, such as to render the covenant in restraint unenforceable?

(iii)    the references to “Group Company”, “Group Member”, “any Group Company” and “Group Employees or Contractors” in clause 3.1 of Schedule 2 of the Second Contract are unreasonably and unduly wide, such as to render the covenant in restraint unenforceable?

(Emphasis in the original)

12    Prescott Securities contends that the Separate Questions can be determined on the basis of the facts admitted by Mr Gobbett in his amended defence. It indicates a willingness to agree with Mr Gobbett any further facts which he considers are necessary for the determination of the questions. Mr Gobbett opposes the hearing and determination of the Separate Questions and disputes that the facts which he has admitted will provide a sufficient basis for the Court’s determination of the three questions in para (b) of Prescott Securities’ proposal.

13    The principles on which the Court acts in determining applications of this kind are settled. They have been stated in numerous authorities including Rainsford v Victoria [2005] FCAFC 163, (2005) 144 FCR 279 at [34]-[41]; AWB Ltd v Cole (No 2) [2006] FCA 913, (2006) 233 ALR 453 at [26]-[40]; Tallglen Pty Ltd v Pay TV Holdings Pty Ltd (1996) 22 ACSR 130 at 141-2; and Reading Australia Pty Ltd v Australian Mutual Provident Society [1999] FCA 718, (1999) 240 FCR 276 at [8]-[9]. The principles relevant presently can be summarised as follows (excluding the citations of the authorities from which they are drawn):

(a)    the general rule is that all issues of fact and law in a proceeding should be determined at the one time;

(b)    a party seeking a departure from the general rule should demonstrate that it is just and convenient for that course to be adopted;

(c)    it is inappropriate to order the trial of a separate question if that trial would not permit or involve a conclusive or final judicial decision based on concrete facts, either established or agreed, for the purpose of quelling a controversy between the parties;

(d)    when the separate question is one of mixed fact and law it is essential that there be precision both in formulating the question and in the identification of the facts upon which it is to be decided;

(e)     it is contrary to the judicial process and no part of the judicial power to effect a determination of rights by applying the law to facts which are neither agreed nor determined by reference to the evidence in the case;

(f)    great caution should be exercised in formulating a separate question for determination on the basis of assumed facts;

(g)    providing that the appropriate factual foundation for the determination of an issue has been resolved, a matter may be “ripe” for separate and preliminary determination when it is a central issue in contention between the parties and its resolution will either obviate the necessity of litigation altogether or narrow substantially the field of controversy;

(h)    the courts have repeatedly warned of the dangers which attend the trial of separate or preliminary questions and the desired benefits of doing so often prove illusory. Disadvantages arise from the fragmentation of the trial process, the potential for delay in the resolution of the overall litigation, the prospect of an appeal or appeals following the decision in the first stage of the trial, the prospect that the same witness may have to give evidence in each stage of the trial, and the prospect that the trial Judge may make adverse findings of credit concerning one or more witnesses in the first stage thereby compromising the Judge’s ability to continue with the second stage of the trial if the same witnesses are to be called.

14    Prescott Securities’ submissions characterise the questions (i), (ii) and (iii) in para (b) as questions of construction, that is, involving the proper construction of Mr Gobbett’s employment contract. On that basis, it submitted that the trial of the separate questions could proceed on the basis of the admissions made by Mr Gobbett of identified matters in the further amended statement of claim. It contended that this would involve a short trial without the Court having to hear and determine evidence from witnesses. Alternatively, if evidence is required, it would be of a relatively narrow compass.

15    In my opinion, the issues raised by the three questions concerning the reasonableness of the Restrictive Covenant cannot properly be described as questions of construction. As is usually the case, a question of reasonableness is a question of fact. For the reasons which follow, that is the position in respect of the enforceability of covenants in restraint of trade.

16    The starting position is that a term in restraint of trade is presumed by the law to be invalid. The presumption is rebuttable by proof that the restraint is reasonable. It is for the party seeking to enforce the restraint to demonstrate that reasonableness: Lindner v Murdock’s Garage (1950) 83 CLR 628 at 640 and 645 (McTiernan J) and 653-4 (Kitto J). In making that assessment, the Court has regard to the interests of both parties: Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535; and Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 at 300. In the case of covenants restricting the ability of an employee to compete with a former employer, the primary test of reasonableness is the period of time it will take to break the customer’s connection with the former employee or, as stated in some cases, the time it may be expected to take for a replacement employee to build up the necessary connection: Stenhouse Australia Ltd v Phillips (1973) 2 NSWLR 691 at 699; NE Perry Pty Ltd v Judge [2002] SASC 312, (2002) 84 SASR 86 at [28]-[30] (Doyle CJ); Rentokil Pty Ltd v Lee (1995) 66 SASR 301 at 303-5; and Wallis Nominees (Computing) Pty Ltd v Pickett [2013] VSCA 24, (2013) 45 VR 657 at [56].

17    The factual nature of this inquiry is illustrated by a number of the authorities. In Stenhouse Australia, the Privy Council said, at 699:

It is for the Judge, after informing himself as fully as he can on the facts and circumstances relating to the employer’s business, the nature of the employer’s interest to be protected, and the likely effect on this of solicitation, to decide whether the contractual period is reasonable or not. An opinion as to the reasonableness of elements of it, particularly of the time during which it is to run, can seldom be precise, and can only be formed on a broad and commonsense view.

See also, Birdanco Noms Pty Ltd v Money [2012] VSCA 64, (2012) 36 VR 341 at [81]-[82]; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 308 (Walsh J); and IF Asia Pacific Pty Ltd v Galbally [2003] VSC 192 at [103].

18    Mr Gobbett does not accept that the Separate Questions can be determined on the basis of his admissions in the pleadings. He says that he will wish to adduce evidence bearing upon the unreasonableness of the restraints which he asserts. That is understandable. It is to be remembered that pleadings contain only the material facts giving rise to a claim or defence and not the evidence bearing upon the existence or otherwise of that claim or defence.

19    Mr Gobbett’s intention is to call several witnesses whose evidence will bear on the reasonableness or otherwise of the Restrictive Covenant. It is probable that several of these witnesses would also need to attend to give evidence in the second stage of the trial. There would be obvious inconvenience in doing so. Further, there is the prospect of the trial Judge forming views about the credibility or otherwise of witnesses in the first stage which may compromise the Judge’s ability to continue with the trial.

20    All these matters point to the inappropriateness of an order that the issues identified in (b) of Prescott Securities’ application be heard and determined in advance of other issues in the trial.

21    It may be the case, as Prescott Securities contends, that question (a) is a question of construction only. However, one cannot exclude the possibility of some evidence being pertinent, for example, evidence of the factual circumstances in which the Deed was negotiated. However, even without that consideration, I do not consider that the advantages to be obtained by a separate hearing and determination of question (a) warrant the hearing and determination of that issue in advance of the other issues in the proceedings.

22    For these reasons, Prescott Securities’ application for the separate hearing and determination of some questions is refused. I will hear from the parties as to costs.

Associate:

Dated:    9 February 2017