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RESTRAINTS OF TRADE IN NEW SOUTH WALES
Arthur Moses[*]
ABSTRACT
This aim of this article is to provide a general overview of the legal principles applying to restraint of trade clauses in the contract of employment and associated litigation. It looks at how restraint of trade clauses are enforced by employers, through the use of interlocutory injunctions, to protect trade secrets and confidential information. It also examines how employees may seek to invalidate restraint of trade clauses through the use of s 106 of the Industrial Relations Act 1996 (NSW). It reviews the factors relevant to an exercise of discretion by the Federal Court and Supreme Court to stay proceedings pending determination of s 106 proceedings, as well as discussing when the court will order the cross-vesting of s 106 proceedings from the New South Wales Industrial Relations Commission to the Supreme Court of New South Wales. The focus of this article is primarily on the legal position in New South Wales, where the common law is substantially modified by the statutory overlay of the Restraints of Trade Act 1976 (NSW) and the Industrial Relations Act 1996 (NSW).
INTRODUCTION
This article is aimed at giving a general overview of legal principles which apply to restraint of trade clauses in employment contracts and associated litigation. Specifically, it will address six issues:
How does the Supreme Court of New South Wales determine whether a restraint clause in a contract of employment is valid?;
The protection of trade secrets and confidential information;
The use of interlocutory injunctions to enforce restraint of trade clauses in employment contracts; and
The use of proceedings under s106 of the Industrial Relations Act 1996 (NSW) by employees to invalidate restraint of trade clauses in employment contracts;
The principles relevant to the exercise of discretion by the Federal Court and Supreme Court to stay proceedings pending determination of s 106 proceedings;
The cross-vesting of proceedings commenced in the Industrial Relations Commission of NSW in Court Session into the Supreme Court of NSW.
This article concentrates upon the position in New South Wales because it is a jurisdiction in which the common law in relation to restraints of trade is substantially modified by the statutory overlay of the Restraints of Trade Act 1976 (NSW) and the Industrial Relations Act 1996 (NSW). The starting position in New South Wales is the same as in each of the other Australian states, but there are then further steps to be considered. This article focuses upon those further steps.
1. HOW DOES THE SUPREME COURT OF NEW SOUTH WALES DETERMINE WHETHER A RESTRAINT OF TRADE CLAUSE IN A CONTRACT OF EMPLOYMENT IS VALID?
The terms of a restraint of trade covenant, if any, entered into by an employer to protect its interests will, of course, be critical in determining its rights and liabilities following the departure of an employee.
In the absence of contractual restraint or confidentiality issues, an employee may, after termination of his or her contract, canvass customers: see for example Wessex Diaries Ltd v Smith,[1] Weldon & Co v Harbinson,[2] and Australian Billboard Connections Pty Ltd v Richard Jansen.[3] Accordingly, it is important that restraints be set out in a contract.
The common law doctrine of restraint of trade is conveniently set out in Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Limited:[4]
The public have an interest in every person carrying on his [sic] trade freely; so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.
A restraint clause that imposes obligations upon employees after their employment terminates is prima facie void at common law (see for example Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co[5] and Woolworths Limited v Mark Konrad Olson[6]) 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 of demonstrating its validity rests upon the party seeking to rely on the covenant: see for example Herbert Morris Limited v Saxelby.[7]
However in New South Wales, s 4(1) of the Restraints of Trade Act 1976 (NSW) can be invoked. It provides that ‘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.’
As McLelland J held in Orton v Melman,[8] the proper approach when applying this provision involves:
[F]irst[ly] to determine whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed, and if so, then to determine whether the restraint, so far as it applies to that breach, is contrary to public policy. If the restraint, so far as it applies to that breach, is not contrary to public policy then by force of s4(1) the restraint is to that extent valid, subject always of course to any order which may be made under s4(3).
It should be noted that a discretion is provided in s 4(1) of the Restraints of Trade Act 1976 (NSW) because of the wide language in which the Court's power is enacted and the susceptibility of that language to give rise to reasonable differences of opinion. Such differences are inevitable because of the call upon value judgments which the generality of the language requires.
Woolworths Limited v Mark Konrad Olson[9], a judgment delivered by the NSW Court of Appeal on 6 October 2004, has in a concise manner set out the relevant principles which will guide the exercise of the discretion set out in s 4(1) of the Restraints of Trade Act 1976 (NSW) when employment contract cases are being litigated. These principles include:
Whilst the Court will generally take a stricter and less favourable view of a restraint of trade entered into in an employment relationship than of a similar restraint in a commercial agreement, an employer may have interests capable of protection by a restraint such as retention of customers and trade secrets[10];
Protection of trade secrets by a restraint will be reasonable even though the law offers a degree of protection against the unauthorised use of trade secrets by former employees[11];
A contractual agreement as to what constitutes a reasonable restraint will be given considerable weight but is not conclusive of whether the restraint is valid[12];
The validity of the restraint is to be assessed at the time of the contract of employment being entered into rather than what has actually been done pursuant to the contract of employment[13];
The Court may not re-write the covenant while exercising the power under s 4(1) but may “amputate it” to ignore the fact that the restraint goes beyond what is reasonable[14].
Negative covenants in employment contracts
It is important to distinguish between an employment contract which contains negative covenants, which operate only during the course of the period of employment, and one which contains negative covenants which operate beyond the expiration of the period of employment. The importance of this distinction lies in the application of the doctrine against restraint of trade.
In Buckenara v Hawthorn Football Club Ltd,[15] Crockett J of the Supreme Court of Victoria stated that only in ‘very unusual’ circumstances will a restraint that operates during the employment be found to be unreasonable.[16] Crockett J held that a term which merely prevents an employee from ‘working for another during the period of employment is in no way unreasonable.’[17]
In Curro v Beyond Productions Pty Limited,[18] the New South Wales Court of Appeal considered a clause wherein the appellant agreed that she would not, inter alia, during the course of the employment, offer her services to another without the prior written consent of the employer. For present purposes, it is relevant to note that the appellant submitted that this clause was an unreasonable restraint of trade on the basis that she had a “right to work”. The Court of Appeal found that the restraints were not unreasonable and that the negative promises were not ‘unnecessary or oppressive’.[19] The Court of Appeal held that an agreement will fall foul of the restraint of trade doctrine if the negative covenant exceeds what is reasonably necessary for the protection of the legitimate business interests of the other party.[20]
In Curro, the Court of Appeal held that in cases involving ‘special services’ an agreement not to work for a competitor will be enforced.[21] It found that an injunction will be granted in such a situation where ‘the balance of discretionary factors is in the Plaintiff's favour.’[22] Essentially, in Curro, the Court of Appeal held that the injunction did ‘no more than to oblige Ms Curro to comply with negative promises which are part of a fair and freely negotiated bargain’.[23]
In Evening Standard v Henderson,[24] the English Court of Appeal considered an application for an interlocutory injunction seeking to restrain an employee from working for a rival during the employee’s notice period (the employee having agreed to give 12 months notice of termination). In breach of his contract, the employee gave 2 months notice and took up a position with a rival company. The contract of employment also contained a covenant that the employee would devote his entire services to the interests of the employer during the period of employment.[25]
In exercising the discretion, Lawton LJ sought to balance the damage to be suffered by the plaintiff employer against the rule of “trite law” that an injunction will not be issued against an employee to enforce a negative covenant if the consequences of it would be to require the employee to either continue to work for the employer or to starve or be idle.[26] He noted that an offer had been made by the plaintiff employer that the employee could return to work during the notice period. Ultimately, Lawton LJ held that the balance of convenience required that the injunction be granted.[27]
The application of this case in Australia should be considered in light of the judgment of the High Court of Australia in Sanders v Snell[28] which confirmed the general common law position that an employer is not obliged to give an employee work as long as the employee is paid.
Woolworths Limited v Mark Konrad Olson – A “fresh” Court of Appeal judgment
In Woolworths Limited v Mark Konrad Olson[29], Woolworths sought to enforce a restraint against a senior employee to preclude him for a period of six months from being employed in Australia and New Zealand from carrying on or being engaged, involved or otherwise interested in, or concerned with any competitive business in Australia or New Zealand. The restraint clause relied upon by Woolworths gave it the option to rely upon the clause. If Woolworths opted to rely upon it, the period of operation of the restraint was 12 months or such lesser period determined by Woolworths in its discretion. Reliance upon the restraint clause was, however, conditional upon Woolworths making a “restraint payment” to the employee of an amount equivalent to his contractual entitlements for the period of the restraint.
The restraint was sought to be enforced by Woolworths in light of the senior employee accepting an offer of employment with Franklins Pty Ltd. There was no issue on the pleadings that Franklins was a business in competition with Woolworths.
At first instance, Einstein, J on 22 September 2004[30] dismissed Woolworths’ application to enforce the restraint clause because it was unreasonable in its scope and was not capable of being read down to give it a reasonable operation. Woolworths appealed this decision and on 6 October 2004, following an expedited hearing on the application for injunctive relief relating to the restraint of trade clause (the appeal relating to other aspects of the matter was not dealt with at this time), the NSW Court of Appeal upheld the appeal[31] and granted an injunction restraining Mr Olson from commencing employment with Franklins or any other supermarket business with which Woolworths Limited competed in Australia for a period of six months.
Critical to the reasoning of Mason, P (with whom McColl and Bryson JJA agreed) were the following findings:
| i. | The restraint protected a legitimate interest of Woolworths, namely valuable trade secrets. The Court of Appeal observed that it is easier to enforce such a restraint than a breach of confidence claim because it provides certainty of compliance[32]. |
Taking into consideration the “restraint payment” of six months of Mr Olson’s salary, the restraint did not prevent Mr Olson from earning a living[33];
Section 4(1) of the Restraints of Trade Act 1976 (NSW) enabled the Court to read down the restraint to make it reasonable;
The restraint clause was not void for uncertainty on the basis that Woolworths had an option to rely on the restraint or to lessen the twelve month outer limit of the restraint[34].
The invocation of s 106 of the Industrial Relations Act 1996 (NSW) by Mr Olson (as this was a cross vested matter) did not deny Woolworths the right to injunctive relief. The restraint was fair and consistent with the public interest when the employment contract was entered into by the parties. Further, there was no unfairness either at the commencement or during the employment relationship which made the restraint clause unfair within the meaning of s 105 of the Industrial Relations Act 1996 (NSW)[35].
2. PROTECTION OF TRADE SECRETS AND CONFIDENTIAL INFORMATION
An employer is entitled to protect information, as confidential information, which comes into the possession of an employee during the course of his or her employment, by contractual agreement: see for example Two Lands Services Pty Ltd v Gregory Robert Cave[36] and Idameneo (No 123) P/L v Ticco Pty Ltd & Anor.[37]
The dangers of seeking to protect alleged confidential information in the absence of a contractual agreement and restraint of trade clauses, was highlighted by Bryson J in Weldon & Co v Harbinson;[38] see also Australian Billboard Connections Pty Ltd v Jansen.[39] However, as is made clear by the Full Court of the Supreme Court of South Australia in NP Generations Pty Ltd v Feneley,[40] a former employee (regardless of any contractual provision) has a duty:
| i. | to return confidential information belonging to the former employer, even if it is not used; and |
not to use confidential information belonging to his or her employer, which remains in his or her possession.
In any event, even in the case of a contractual agreement, the principles applicable to the rights and obligations of former employees of a company with respect to activities competitive with those of the company, and the disclosure of information derived from their employment by the company, involves a reconciliation of two competing interests.
It is necessary to establish:
| 1. | The confidentiality of the information acquired by the employee during the employment with the employer; and |
That the actions of the employee involves the wrongful use and disclosure of such confidential information.
In Coco v AN Clark (Engineers) Ltd,[41] Megarry J expounded the three elements normally required if a case of breach of confidence is to succeed:[42]
| 1. | The information itself must have ‘the necessary quality of confidence about it’; |
That information must have been imparted in circumstances importing an obligation of confidence; and
There must be an unauthorised use of that information to the detriment of the party communicating it.
In most cases the relevant principles are usually not in question between the parties. The issue usually is rather the effect of those principles in their application to the circumstances of the case in question.
In Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd,[43] Gowans J emphasised[44] the distinction to be maintained between information and knowledge acquired in confidence by an employee (a) during his employment and (b) which he seeks to use or disclose for his own advantage after his employment has finished, with the distinction to be drawn:
between information which forms part of the employees’ stock of general knowledge, skill and experience, and that which should fairly be regarded as a separate part of the employees’ stock of knowledge (whether it is identifiable as “particular” or “detailed” or “special” which a man of ordinary intelligence and honesty would regard as the properly of the former employer. [Emphasis added.][45]
The mere fact that confidential information is not embodied in a document but is carried away by an employee in his head is not of itself a reason against the granting of an injunction to prevent its use or disclosure by him.[46]
The application of the principles in any given case has to be reconciled with the rule of public policy that a man is not to be restrained, either by contract or otherwise from using after his employment his personal skill, knowledge and experience.[47]
When is information acquired during employment confidential?
In Metrans v Courtney-Smith,[48] it was contended that the knowledge acquired by the employee during employment with the plaintiff either was intrinsically confidential in its nature, or fell into that category of special knowledge which the employee was not at liberty to treat as her own after termination of her employment.
In that case the employee had acquired, in the course of her employment in the courier and taxi truck industry, great skill and proficiency in the marketing of certain services, and a familiarity with all aspects of the industry. The industry was a highly competitive one, which made the employee a valuable person to employ. The evidence established that the employee had been active in soliciting business from, amongst others, customers of the firms who were customers of the plaintiff with whom the employee dealt during her employment with the plaintiff. Some of the firms had had a long association with the employee, which pre-dated her employment by the plaintiff. Others had a persona1 relationship of friendship with the employee sufficient to persuade them to following her into her new work. It was there held:[49]
The firm impression created in my mind by the evidence is that the (employees’s) skill and ability resulted in her acquiring many customers for the plaintiff and enabled her to maintain accounts of other customers of the plaintiff by reason of her efforts and efficient and assiduous attention to their needs. The knowledge of such customers which she acquired during her employment with the plaintiff seems to me to fall into the category of general knowledge inevitably acquired by her as a necessary consequence of her employment especially having regard to the way in which it was acquired. Likewise, the knowledge which she acquired of the methods and procedures of the plaintiff’s business appeared to me to fall into the same category as constituting her stock of general knowledge and experience which she acquired in the ordinary course of her activities as sales manager of the plaintiff.
In that case, the court refused an injunction as the plaintiff had not established a prima facie case on the ground of confidentiality, whether such confidentiality be based upon the intrinsic confidentiality of the information or upon the basis that it form some separate part of the employee’s stock of knowledge which ought to be regarded as remaining the property of the plaintiff.
It is important to note that the duty of confidentiality is only breached by the misuse of secret information. Where an employer has made no particular effort to prevent the information from freely circulating within or outside its operation, a claim against an employee who takes it away in his or her head and subsequently uses it, must fail, no matter how much damage the use of that information causes the employer: see for example Maggbury Pty Ltd v Hafele Australia Pty Ltd .[50] In Wright v Gasweld Pty Limited,[51] it was held that a trade secret is taken to mean some special class of valuable commercial information which is highly secretive and which an employer has gone to considerable effort to keep confidential.
In Wright v Gasweld,[52] a restraint was read down so as to prevent the disclosure of the identity of a particular business or supplier for a designated period in a specified area. While their identity was not a “trade secret” it was considered by a majority[53] to be sufficiently confidential to be capable of being protected by a written covenant.
Accordingly, it is important when preparing proceedings to enforce a restraint of trade covenant concerning confidential information, to obtain instructions as to the circumstances surrounding the disclosure of the confidential information to employees within the employer and whether there was restricted access to such information. These are relevant considerations in determining whether the material constitutes confidential information.
Cascading restraint clauses
There is a divergence of opinions between judges in New South Wales as to the enforceability of restraint of trade provisions that contain a cascading list of restraints, both as to the period of operation and the geographical operation of the restraint.
In HiTech Contracting Limited v Jane Lynn,[54] the Court considered an application, inter alia, for an injunction restraining a former employee from taking employment in a competing business. The restraint of trade clause relied upon was a ‘cascading’ restraint clause which contained clearly defined restraints, both as to duration and breadth of territorial operation and presented those to the Court as ‘clear choices’ if necessary to be read down in order to determine the restraint period. Austin J considered that the cascading provisions in that case enabled the excision of an unenforceable part of the restraint, without changing the meaning of the restraint of trade clause.
In Tyser Reinsurance Brokers Pty Ltd v Cooper,[55] Young J considered the enforceability of a restraint of trade clause, which in effect defined the restraint period as being one of three alternatives without precisely specifying what was the restraint period and without an internal mechanism for reading down any unenforceable restraint.
In considering the provision, (apart from also dealing with a claim for rectification), Young J considered that there were ‘very real’ difficulties with the clause. Young J expressed the view that ‘The restraint period should not differ depending on what a court should hold’ and that such a clause was not a reasonable way of letting an employee know what are the requirements that bind them. Ultimately, Young J found the employment agreement relied upon was void for uncertainty on a separate basis. However, the comments of Young J on the operation of the particular ‘cascading’ clause are instructive. It appears that if the clause itself does not provide a defined restraint period, with an internal mechanism by which the Court may read it down, it may be subject to attack for uncertainty. It is to be noted, however, that the comments are obiter only as Young J did not decide the case on this point. Because of the absence of restraint of trade legislation in the other States and Territories, the view of Young, J on cascading provisions would be the likely result in those States and Territories.
3. THE USE OF INTERLOCUTORY INJUNCTIONS TO ENFORCE RESTRAINT OF TRADE CLAUSES IN EMPLOYMENT CONTRACTS
Young J in Ecco Personnel Pty Limited v Novotny (No 2)[56] and Network Ten Limited v Fulwood[57] and more recently Campbell, J in Capgemini US v Case[58] and Hamilton, J in Huhtamaki Australia Ltd v Botha[59] have set out, in a useful manner, the issues to be determined when considering whether the Court should grant an interlocutory injunction to enforce a restraint of trade clause in an employment contract. These issues can be summarised as follows:
| 1. | Has there been a timely application for interlocutory relief? If interlocutory relief is to be sought, it should always be sought promptly. The Court is entitled to use, as a litmus test of the seriousness of the infringement of a Plaintiff’s rights which is occurring, how fast the Plaintiff reacts to the infringement of its rights. Campbell, J in Capgemini US v Case[60] held that this “is not only an example of the equitable doctrine of laches that delay is relevant on an application for an interlocutory injunction; it is also as an admission by conduct about how serious the infringement of the Plaintiff’s rights it”. Campbell, J also observed that “it is a matter which goes to the balance of convenience and not merely to the question of whether there is a serious questions to be tried, which might be met by a defence of laches at the trial”; |
Is there evidence of a breach of the restraints by the former employee?
Is there an arguable case that the restraint covenant is valid as read down under the Restraints of Trade Act 1976 (NSW)?
Does the balance of convenience lie in favour of the granting of the injunction to the employer?
Are damages an adequate alternative remedy to the granting of an injunction?
It is a trite observation that each of these issues should be the subject of evidence and submissions when an application is being made for an interlocutory injunction to prevent an employee from breaching a restraint of trade clause.
As to point 5, it is to be noted that in the Hi-Tech case,[61] Austin J granted an injunction preventing a former employee from taking up employment with a competitor. In that case, Austin J took the view that damages would not be an adequate remedy as it would be extremely difficult for the Court to assess the damage which might be suffered where the former employee had been engaged in specialist services and was ‘armed with skills and contacts’, and had deliberately breached a valid restraint of trade clause in the employment contract by taking employment with a competitor.
4. THE USE OF SECTION 106 OF THE INDUSTRIAL RELATIONS ACT 1996 (NSW) TO INVALIDATE RESTRAINT OF TRADE COVENANTS
There has been an increasing trend in s 106 cases for restraint of trade covenants to be attacked (even by executives engaged in other States, on the premise that part of their work had a relevant connection to New South Wales)[62] as being harsh, unfair or unconscionable. The authorities in the Industrial Relations Commission in Court Session of New South Wales, and its predecessor, the Industrial Court of New South Wales (referred to compendiously in this article, for ease of reference, as “the Commission”) suggest that the appropriate approach in a s 106 case involving a restraint of trade clause is to consider whether any restraint which is sought to be impugned constitutes an unlawful restraint of trade (by applying s 4(1) of the Restraints of Trade Act 1976 (NSW)) before considering the wider test as to whether it is otherwise harsh, unfair or unconscionable: see for example Daley & Ors v NSWRL Limited & Ors[63] and Carter v NSWRL Limited & Ors.[64] In those cases, the Commission did not elaborate as to how the wider tests set out in s 106 would operate to invalidate a restraint of trade provision (in circumstances where it was valid for the purposes of s 4(1) of the Restraints of Trade Act 1976 (NSW)).
It is arguable that it is not open to the Commission to adopt the approach set out in Daley & Ors v NSWRL Limited & Ors[65] and Carter v NSWRL Limited & Ors,[66] because statutory construction principles would suggest that the intention of the New South Wales Parliament was to ensure that restraint matters are only dealt with in accordance with the Restraints of Trade Act 1976 (NSW). The general words in s 106 are capable of reasonable and sensible application without extending them to a subject specifically dealt with in the Restraints of Trade Act 1976 (NSW): see for example Bank Officials’ Association (South Australian Branch) v Savings Bank of South Australia.[67]
The Commission has demonstrated that it is not inclined to adopt a restrictive approach to this question. In Harper v Candle Australia Limited,[68] Glynn J considered an application under s 106 which sought to vary, inter alia, restraints of trade in a contract of employment, following an application to the Supreme Court by the Respondent to enforce the subject restraints. Glynn J accepted that the Commission had the jurisdiction to deal with a claim relating to alleged unfairness of restraints of trade in terms of s 105(a) or s 105(b) of the Industrial Relations Act 1996 (NSW). Glynn J approached the matter on the basis that the Commission had jurisdiction to deal with the matter, notwithstanding the fact that there were Supreme Court proceedings on foot.
It was held that the proper approach is for the Commission to determine whether those restraints are an “unfair contract” in terms of s 105 and if so, whether any necessary variation needs to be made. The judgment of Glynn J in Harper’s case was recently followed by Peterson J in Darrow v FreshFood Management Services Pty Ltd.[69]
Of course, it is arguable that it is not open to an employee who has been the subject of an adverse decision in the Supreme Court in an enforcement of restraint proceedings, to then commence proceedings pursuant to s 106 of the Industrial Relations Act 1996 (NSW) seeking to vary or declare void the restraint provisions in his or her employment contract. In that regard reference is made to the judgment of the New South Wales Court of Appeal in Tszyu v Fightvision Pty Ltd.[70] For present purposes, it is unnecessary to detail the background to that judgment. However, the judgment of Mason, P (with whom Priestley and Powell JJA agreed) is important in a number of respects:
| 1. | it emphasised the fact that the principles of estoppel apply to proceedings before the Industrial Relations Commission of NSW;[71] |
the jurisdiction of the Commission allows it to make orders that are broader than those of a court relying upon common law or equitable doctrines;[72]
although the case did not decide that the result of a Supreme Court judgment is never amendable to overreaching through the exercise of the Commission’s jurisdiction under s 106, it did emphasise that this is a large and difficult issue;[73] and
although the case did not have to decide the issue whether a party ordered to pay costs in one set of proceedings can seek in other proceedings between the same parties to negate the effect of a costs order by claiming damages equivalent to the costs ordered to be paid,[74] the Court of Appeal did refer to its decision in Avenhouse v Hornsby Shire Council[75] which took the view that such damages should not be available.
It should be noted that in Green v Brown,[76] a Full Bench of the Commission directly addressed the question of whether the result of a Supreme Court judgment is amenable to overreaching through the exercise of the Commission’s jurisdiction pursuant to s106 of the Industrial Relations Act 1996 (NSW). In the circumstances of that case, the Full Bench held, on appeal, that Schmidt J had erred in making orders which reversed the effect of orders made by the Supreme Court of New South Wales. Such orders, it was held, could arguably bring the administration of justice into disrepute.
Given the obvious difficulties in commencing such proceedings following the determination of Supreme Court proceedings enforcing a restraint of trade provision, an application pursuant to s 106 of the Industrial Relations Act 1996 (NSW) should be made prior to the determination of the Supreme Court proceedings. In those circumstances, the parties have two options:
a stay could be sought of the Supreme Court proceedings pending the final determination of the s 106 proceedings before the Commission; or
the s 106 proceedings could be cross vested into the Supreme Court of a State or Territory and dealt with at the same time as the restraint of trade action: see for example Bruning v Kingmill (Australia)Pty Ltd & Anor[77] and Resarta Pty Ltd v Finemore.[78]
5. THE PRINCIPLES RELEVANT TO THE EXERCISE OF DISCRETION BY THE FEDERAL COURT AND SUPREME COURT TO STAY PROCEEDINGS PENDING DETERMINATION OF SECTION 106 PROCEEDINGS.
Where there are conflicting proceedings, based upon a contract, in the Supreme Court of NSW (or the Federal Court of Australia) on the one hand, and the Commission on the other hand, a party may move the Supreme Court (or the Federal Court) for an order that those proceedings be stayed pending the outcome of the Commission proceedings. Usually (but not always), the moving party will be the applicant in the proceedings in the Commission.
The moving party will argue that it will not be possible to ascertain what the content of the contract (or contracts) upon which the parties rely, and the content of the substantive provisions in respect of which allegations of contravention are made, until the Industrial Relations Commission proceedings have been determined: see for example L & W Developments Pty Ltd v Della;[79] Idameneo (No 123) v Swe[80] and Software Engineers Australia (NSW) Pty Ltd v Bonket Pty Ltd.[81]
The factors which both the Supreme Court of NSW and the Federal Court of Australia have determined are relevant when considering such a stay application are:
| 1. | Which proceeding was commenced first; |
Whether the termination of one proceeding is likely to have a material effect on the other;
The public interest;
The undesirability of two courts completing to see which of them determines common facts first;
Whether work done on pleadings, particulars, discovery, interrogatories and preparation might be wasted;
The undesirability of substantial waste of time and effort if it becomes a common practice to bring actions in two courts involving substantially the same issues;
How far advanced the proceedings are in each court;
The principle that the law should strive against permitting multiplicity of proceedings in relation to similar issues; and
Generally balancing the advantages and disadvantages to each party.[82]
6. THE CROSS-VESTING OF PROCEEDINGS COMMENCED IN THE INDUSTRIAL RELATIONS COMMISSION OF NSW IN COURT SESSION INTO A SUPREME COURT.
The only court which can decide both s 106 proceedings and proceedings under federal legislation such as the Corporations Act 2001 (Cth) or proceedings commenced in a Supreme Court (other than the Supreme Court of NSW) are the Supreme Courts of the States or Territories.
It is not possible for the Federal Court to order that s 106 proceedings be removed into the Federal Court.
In Re Wakim, ex parte McNally,[83] the High Court held that the provisions of the cross-vesting legislation which purported to give Federal courts jurisdiction to exercise State judicial power were invalid.
As a result of the decision in Re Wakim[84] it is no longer possible to use the cross vesting legislation to transfer proceedings based on State legislation, such as s 106 Industrial Relations Act 1996 (NSW), to the Federal Court.
Further, the Federal Court of Australia has no accrued jurisdiction to deal with s 106 proceedings: see for example The Rochester Communications Group Pty Ltd v Adler.[85]
Can the IRC Proceedings be cross-vested into a State Supreme Court?
In Resarta Pty Limited v Finemore,[86] the New South Wales Court of Appeal was considering an application to cross-vest Commission proceedings under s 106 into the Supreme Court of New South Wales so that they could then be cross-vested to the Supreme Court of Victoria. Einstein J had earlier made an order removing the determination of that question into the Court of Appeal.
The appellant’s primary contention was that the Supreme Court did not have jurisdiction to transfer such proceedings pursuant to the cross-vesting legislation. That contention was rejected by the Court of Appeal. It was held that the cross vesting legislation permits s 106 proceedings to be transferred, and that what a court considering such an application must consider is whether or not the discretion to permit such transfer ought be exercised in the circumstances of the particular case.[87]
Relevant factors to the exercise of discretion
A primary consideration is the degree of overlap between the proceedings sought to be transferred and the proceedings with which they are to be consolidated. In Finemore,[88] there was a complete overlap of proceedings by virtue of the fact that the respondent in the Commission proceedings pleaded its claim in proceedings in the Supreme Court of Victoria by way of defence to the Commission proceedings. Although the Court of Appeal noted that this may be suggestive of an abuse of process (that is, the form of the pleading suggested that it was made with a cross vesting application in mind), this point was not taken. Accordingly, it was said that such circumstances amount to a clear case for the exercise of power under s 5 of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (NSW). It was held to be in the interests of justice to transfer to the s 106 proceedings in order to ensure there are not two sets of proceedings in which the same matters are determined.[89]
Foster AJA held that the question for determination is whether the interests of justice require that the proceedings be transferred.[90] Importantly in Finemore, the Supreme Court of Victoria had already determined not to transfer those proceedings to NSW. Foster AJA said that in these circumstances, if no transfer of proceedings occurred (given that both sets of proceedings involved the same areas of fact and relevant agreements), there would be duplication and potential conflict of decisions, being the very problems cross-vesting legislation is designed to avoid.[91] The fact that the defence in the Commission proceedings involved the allegations pleaded in the Supreme Court of Victoria meant that the Commission would be seised of the issues in the Victorian proceedings; however, if it found in favour of Resarta on those issues, it would not have the power to make the orders under the Corporations Law (Cth) which were sought by Resarta in the Victorian proceedings – in other words, the only Court which could deal with all of the orders was the Supreme Court of Victoria and it was therefore appropriate to transfer the proceedings to that jurisdiction.[92]
Can the Federal Court Proceedings be cross-vested into the Supreme Court of New South Wales?
Any application to cross-vest Federal Court proceedings to the Supreme Court would be made under the jurisdiction conferred by s 5(4) of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth). That section provides, inter alia, that where there is a proceeding pending in the Federal Court, and it appears that the said proceeding arises out of or is related to another proceeding pending in the Supreme Court of a State or Territory, and it is more appropriate for that proceeding to be determined by that Supreme Court (having regard to the listed criteria), then the Federal Court must transfer the proceedings to the Supreme Court.
In Palm Springs Ltd v Darling,[93] the Full Court of the Federal Court considered that to have all disputes between litigants determined in one jurisdiction is an appropriate and legitimate objective. In that case, the Full Court held that the commencement of proceedings in the Federal Court with the stated objective of transferring those proceedings (together with s 106 proceedings which had been commenced in the Commission) to the Supreme Court of New South Wales was not an abuse of process. Whether or not the Federal Court will make a cross-vesting order to the Supreme Court however, depends on the Court being satisfied that the interests of justice will be served in so ordering.[94]
Importantly, in Palm Springs, the Full Court also made comments about the conduct of the lawyers resisting the cross-vesting application. It was said that the approach of those lawyers was to have overlapping proceedings raising complex legal and factual issues conducted in at least two separate forums. The Court asked rhetorically how this could possibly be in the interests of justice.[95] In other words, it would seem that “active” opposition by a party to a cross vesting application without sufficient basis will not only involve a risk of costs being awarded against that party, but will also put into question the motives of taking such a position.
CONCLUSION
It remains to be seen whether the emerging use of s 106 as a “shield” against the enforcement of restraint of trade provisions in a contract, will lead to an increase in applications for the Supreme Court of New South Wales or the Supreme Courts of other States or Territories to deal with s 106 matters as part of a restraint of trade action or other related proceedings.[96] This will no doubt lead to the development of a new area of case law concerning the exercise of the wide discretion given to the Commission pursuant to s 106 of the Industrial Relations Act 1996 (NSW). Woolworths Limited v Mark Konrad Olson[97] is an example of a s 106 and restraint of trade matter that has been dealt with in the one set of proceedings by the Supreme Court of NSW and the NSW Court of Appeal. It has been observed that the Supreme Court of New South Wales is not bound by the decisions of the Commission when determining proceedings under s106 which have been cross-vested to it: see Tryam Pty Ltd & Anor v Grainco Australia Ltd & Ors.[98]
The splitting of contractual disputes, which have been commenced in the Supreme Court of New South Wales, by the commencement of s 106 proceedings in the Commission (which will occur if the Supreme Court of New South Wales stays its proceedings, given that there is no mechanism to cross-vest the s 106 proceedings into the Supreme Court of New South Wales) has led to expressions of frustration about delays and costs by senior judicial officers: see for example Mitchforce v Industrial Relations Commission & Ors.[99] Regrettably, this is necessitated by the fact that the Supreme Court of New South Wales and the Commission are each restricted to the jurisdiction conferred upon each court, and the fact that there is no legislative basis for the whole of the matters in each court to be dealt with in one consolidated proceedings: see for example Idameneo (No 123) Pty Limited v Swe.[100]
In light of the frustration about delays expressed by Mason, P in Mitchforce[101] and his, with respect, unnecessary comments regarding the experience of judges of the Commission to determine commercial disputes,[102] the time may have arrived for the NSW Parliament to consider amending the Industrial Relations Act 1996 (NSW). The amendments which may be considered would include granting the Supreme Court of New South Wales jurisdiction to hear and determine s 106 proceedings when dealing with associated claims, or to give the Commission an accrued jurisdiction to hear and determine claims associated with s 106 proceedings. Perhaps if such amendments were made, it would overcome the difficulties expressed by Mason P in Mitchforce[103] and may give the Supreme Court of New South Wales a better understanding of the important nature of the jurisdiction which is exercised pursuant to s 106 of the Industrial Relations Act 1996 (NSW). At the very least, such amendments would prevent “turf wars” from being played out in judgments of both the New South Wales Court of Appeal and the Full Bench of Commission.
[*] Barrister, Frederick Jordan Chambers, Sydney.
[2] [2000] NSWSC 272, Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2000/272.html> at 5 Janaury 2005.
[3] [2001] VSC 471, Australian Legal information Institute <http://www.austlii.edu.au/au/cases/vic/VSC/2001/471.html> at 5 January 2005.
[4] [1894] AC 535, 565.
[5] Ibid.
[6] [2004] NSWCA 372, [37], Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/NSWCA/2004/372.html> at 5 January 2005.
[7] [1916] 1 AC 688, 715.
[8] (1981) 1 NSWLR 587.
[9] [2004] NSWCA 372, [37], Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/NSWCA/2004/372.html> at 5 January 2005.
[10] Ibid [38] (Mason P, McColl and Bryson JJA agreeing).
[11] Ibid [38].
[12] Ibid [39].
[13] Ibid [40].
[14] Ibid [46].
[15] [1988] VicRp 5; [1988] VR 39.
[16] Ibid 44.
[17] Ibid.
[19] Ibid 345, 346B.
[20] Ibid 344B-C.
[21] Ibid 347-348A-D.
[22] Ibid 348D.
[23] Ibid 348F.
[24] [1986] EWCA Civ 9; [1987] ICR 588.
[25] Ibid 591.
[26] Ibid 592F-G, 594B-D.
[27] Ibid 594E.
[29] Above n 9.
[30] [2004] NSWSC 849, [290]-[308], Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2004/849.html> at 5 January 2005.
[31] Above n 9.
[32] Ibid [67].
[33] Ibid [68].
[34] Ibid [69].
[35] Ibid [74].
[36] [2000] NSWSC 14, Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2000/14.html> at 5 January 2005.
[37] [2003] NSWSC 538, [127], Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2003/538.html> at 5 January 2005.
[38] Above n 2.
[39] Above n 3.
[40] [2001] SASC 185, Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/sa/SASC/2001/185.html> at 5 January 2005.
[42] Ibid 47.
[43] [1967] VicRp 7; [1967] VR 37.
[44] Ibid 40.
[45] Ibid.
[46] Printers and Finishers Ltd v. Holloway [1965] RPC 239, 255.
[47] O’Brien v Komesaroff [1982] HCA 33; (1982) 150 CLR 310, 328; Metrans v. Courtney-Smith (1983) 1 IPR 185, 188; Heath Lambert Australia Pty Ltd v Keenan & Ors (2000) 102 IR 306, 308.
[48] Above n 47.
[49] Ibid 191-2.
[50] [2001] HCA 70; (2001) 210 CLR 181. See also Riteway Express Pty Ltd v Clayton (1987) 10 NSWLR 238.
[52] Ibid.
[53] Ibid 334-335 (Kirby P), 341 (Samuels JA); Gleeson CJ dissenting.
[54] Unreported, Supreme Court of NSW, Austin J, 31 May 2001.
[55] [1998] NSWSC 689, Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/supreme_ct/1998/689.html> at 5 January 2005.
[56] Unreported, Supreme Court of NSW, Young J, 11 August 1995.
[58] [2004] NSWSC 674, Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2004/674.html> at 5 January 2005.
[59] [2004] NSWSC 386, Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2004/386.html> at 5 January 2005.
[60] Above n 58.
[61] Above n 54.
[62] Access to the jurisdiction since 24 June 2002 has been limited to those executives earning less than $200,000.00 per annum: see s 108A of the Industrial Relations Act 1996 (NSW) and Aveling v UBS Capital Markets Australia Holdings Ltd [2004] NSWIRComm 261.
[65] Above n 63.
[66] Above n 64.
[67] [1923] HCA 25; (1923) 32 CLR 276.
[68] [2001] NSWIRComm 77, Industrial Relations Commission of NSW in Court Session, Glynn J, 10 April 2001.
[69] [2003] NSWIRComm 264; Industrial Relations Commission of NSW in Court Session, Peterson J, 15 August 2003.
[70] [2001] NSWCA 103; (2001) 104 IR 225.
[71] Ibid [63].
[72] Ibid [49].
[73] Ibid [61].
[74] Ibid.
[76] [2002] NSWIRComm 177; (2002) 116 IR 21.
[78] [2002] NSWCA 250; (2002) 55 NSWLR 320, [89].
[79] [2003] NSWCA 140, Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/NSWCA/2003/140.html> at 5 January 2005.
[80] [2003] NSWSC 384, Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2003/384.html> at 5 January 2005.
[81] [2002] FCA 1168; Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/cth/federal_ct/2002/1168.html> at 5 January 2005.
[82] See the cases cited in Idameneo (No 123) v Swe, above n 80, [9]-[14].
[83] [1999] HCA 27; (1999) 198 CLR 511.
[84] Ibid.
[86] [2002] NSWCA 250; (2002) 55 NSWLR 320.
[87] Ibid [25] (Spigelman J); [88], [92] (Foster AJA).
[88] Above n 86.
[89] Finemore, above n 86, [39] (Spigelman CJ).
[90] Ibid [93].
[91] Ibid [97].
[92] Ibid [98]-[100].
[93] [2002] FCAFC 239; (2002) 192 ALR 763.
[94] Ibid [30].
[95] Ibid [38]. See also Burdekin Pacific Ltd v Wiles [2003] NSWSC 1122, Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2003/1122.html> at 5 January 2005.
[96] Finemore, above n.86 and Deutsche v Johnstone [2002] NSWSC 1241; (2002) 44 ACSR 147.
[97] Above n 6, n 9.
[98] [2003] NSWSC 812, Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2003/1122.html> at 5 January 2005.
[99] [2003] NSWCA 151; (2003) 57 NSWLR 212, [148] (Mason P).
[100] Above n 80, [1].
[101] Above n 99.
[102] Ibid [147]. Similar comments were made by Spigelman, CJ in Solution 6 Holdings Ltd & Ors v Industrial Relations Commission of NSW & Ors [2004] NSWCA 200, [151], Australian Legal Information Institute <http://www.austlii.edu.au/au/cases/nsw/NSWCA/2004/200.html> at 5 January 2005.
[103] Ibid.
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