Donovan Group NZ Limited v Reid [2018] NZHC 2854 (5 November 2018)

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IN THE MATTER	of breach of contract, breach of equitable duty and breach of tortious duties
BETWEEN	DONOVAN GROUP NZ LIMITED Plaintiff/Applicant
AND	HAEMISH LEE REID First Defendant/Respondent
AND	SMARTSTEEL BUILDINGS LIMITED Second Defendant/Respondent
AND	BRETT STEVEN WALDRON Third Defendant/Respondent
AND	WALDRON CONSTRUCTION AND ROOFING LIMITED _{Fourth Defendant/Respondent}

Telephone Conference:	19 October 2018
Counsel:	CJR Baird for Plaintiff
Orders:	19 October 2018
_Reasons:	_{5 November 2018}

[1] In this proceeding, the plaintiff, Donovan Group NZ Limited (the Donovan Group or the Group),¹has brought claims against a former employee, Mr H L Reid (the first defendant), a company incorporated by him (the second defendant), Mr B R Waldron (the third defendant), and a company of which Mr Waldron is a director (the fourth defendant). The Donovan Group has filed a statement of claim alleging:

(a) in contract, a breach of the terms of the confidentiality clause in Mr Reid's former individual employment agreement with the Group (first cause of action);

(b) in equity, a breach of the defendants’ equitable duties of confidence to the Group (second cause of action);

(c) in tort, conversion of the Group's confidential information and intellectual property by the defendants (third cause of action); and

(d) in tort, a conspiracy by the defendants for an unlawful purpose and by unlawful means to harm the Group's business, reputation and goodwill (fourth cause of action).

[2] The substantive relief sought includes declarations, permanent injunctions and claims for damages.

Without notice application for interlocutory orders – injunction, search and preservation

[3] The Donovan Group also applied urgently without notice for interim injunctions and search and preservation orders against the defendants. The orders sought were comprehensive, authorising the Group's agents to search for, inspect, seize and preserve equipment and physical and electronic records relevant to the

matters at issue in the proceeding, and injuncting the defendants from misuse of the

[4] By a Minute dated 19 October 2018, I made orders on a “without notice” basis, largely in terms of the orders sought, after raising some matters in a telephone conference with counsel for the Group, Mr Baird. I said I would issue the reasons for my decision to make the orders in a judgment to be delivered in due course. These are the reasons.

[5] It is necessary to explain the basis for the orders by summarising the facts I have assumed will be proved at trial, based on the affidavit evidence filed with the application.

[6] The Donovan Group carries on business based in Whangarei as a designer, manufacturer, distributor and constructor of steel-framed buildings.

[7] The first defendant, Haemish Lee Reid, is a former general manager of the Coresteel division of the Group. It is alleged that Mr Reid has entered into a joint venture with a former sub-contractor to the Donovan Group, Mr Brett Steven Waldron, who carries on business as a roofing sub-contractor and supplier and constructor of steel buildings through his business, Waldron Construction and Roofing Limited (WCR).

[8] The alleged vehicle for the joint venture is the second defendant, SmartSteel Buildings Limited (SmartSteel), a company which was incorporated at the time of Mr Reid's departure from the Donovan Group. The registered office of SmartSteel is Mr Reid's home address in Whangarei and it is alleged that the company carries on business as a designer, manufacturer, distributor and constructor of steel buildings in direct competition with the Group.

[9] It is said that the Donovan Group is a leader in the New Zealand building industry, having commenced operations in about 1969, and that it has developed building techniques which give it "a unique presence and competitive advantage in the New Zealand steel buildings industry." The Group is said to specialise, through its brands, in supplying a wide-range of steel buildings across a broad spectrum, including large-scale commercial steel buildings through to smaller scale commercial and rural buildings, and to homes, barns, sheds and garages. It is claimed that one of the strengths of the Group is that it effectively provides a one-stop shop for the construction of a wide-range of steel buildings from design, to obtaining resource consents, to manufacturing and to the installation and construction of the building structure itself. It provides building design, structural engineering, detailing service, manufacturing, cladding, firewall systems, fastening and bracing products to clients throughout New Zealand.

[10] The Donovan Group's Coresteel brand’s design and manufacturing operations are based in Whangarei but the buildings are distributed throughout New Zealand in

25 franchise regions. Orders are made by clients either approaching Coresteel direct or through one of its franchise holders. Since commencement of Coresteel's operation in 2009 approximately 1,200 buildings have been finished. Coresteel is said to have approximately 115 building projects under way in various stages of design, consent and manufacturing, and 35 of those projects are currently under construction.

[11] It is said that as part of the evolution of its building design systems, Coresteel has developed two unique construction methods known as the "bracketless portal system" (registered Patent Number 545189, 12 October 2006), and the "tapered box beam system" (which is in the provisional status phase of patent registration). It is alleged that these design systems:

[a] give Coresteel a definite advantage in the market as they allow the construction of steel sheds without the need to provide supports to the roof structure;

[b] have significant economic benefits in terms of being cost effective in increasing the useable space within the building; and

[c] have proved particularly popular for expansive industrial and commercial buildings with Coresteel buildings being used for large- scale retail, logistics and storage facilities and engineering facilities.

[12] The benefits of the system are available also to lifestyle and rural buildings.

[13] The Donovan Group claims a substantial goodwill and commercial reputation for innovative designs, unique features and offerings, and high-quality goods and services in the steel building industry. It is said that it has built up its market share by investing many millions of dollars in its business operations and research and development in order to obtain the market position it currently holds.

[14] It is alleged that the Group’s commercially sensitive and confidential information and intellectual property includes the following:

[c] Its building and building element designs, plans and specifications, including but not limited to its "bracketless portal system" and its "tapered box beam system".

[e] Its own proprietary project management software "Coremanage". [f] Its own proprietary building designs software, "Constructor".

[g] Its own proprietary automated design and manufacture software operated by its design engineering and drafting business, Design Station Limited.

[i] All of its own proprietary design specific pricing which could not be accurately quoted by Design Station software.

[15] Mr Reid began employment with the Donovan Group on 3 February 2012 as the national manager of The Barn Company NZ Limited, which I assume was a Donovan Group subsidiary. He entered into an individual employment agreement with the Donovan Group on that day. It is said that until the time of his resignation on

25 May 2018, Mr Reid was an integral member of the Donovan Group's senior management group, who had access to all aspects of the Group's confidential and highly sensitive private commercial information, including design specifications, manufacturing processes, pricing schedules, costings, margins, client details and knowledge of all current jobs and potential future jobs. Mr Reid was given a smartphone and a desktop computer to provide him with direct access to Donovan Group's confidential information and databases stored in the cloud on Google Drive.

[16] The Barn Company was a brand that had been acquired by the Donovan Group in order to obtain a footing in the smaller steel shed market for barns and rural buildings in particular. The brand was subsequently discontinued and folded into the Coresteel brand.

[17] Following amalgamation of The Barn Company into the Coresteel business, Mr Reid was appointed General Manager of the Coresteel Division and his duties were expanded to include design-specific pricing for buildings that could not be priced through the Design Station software. It is said that this provided Mr Reid with intimate knowledge of the plaintiff's pricing methodology to the point where he could easily reverse engineer the plaintiff's pricing from a set of plans.

[18] Although Mr Reid understood the electrical market through his former employment before joining the Group, he had little or no understanding of the extent of the Group's operation or its confidential or other information relating to design and manufacture of steel buildings and its client and supplier bases through New Zealand.

[19] Mr Reid's employment agreement provided that, at the time of his engagement, his duties were to include provision of franchisee sale support; development of sales reporting tools; assisting with the development and implementation of marketing and sales plans at both franchise and head office level; securing and dealing with sales of new franchises and the resale of existing franchise territories; and the overall performance management of The Barn Company franchise network.

[20] The employment agreement did not include a restraint of trade clause and the plaintiff does not suggest that Mr Reid should be restrained from working in the steel building industry. However, it contained what is said to be a wide-ranging confidentiality clause to protect commercially sensitive and confidential Donovan Group information collected and developed by the Group over many years. The plaintiff asserts that Mr Reid also owed obligations of fidelity and good faith to the Donovan Group while employed by it.

“Confidential information" shall mean information, data and know-how, whether technical or not, which is disclosed to the Employee, and which relates to the research, development or business activities of the Employer, when is either marked or stated to be confidential, or is by its nature reasonably intended to be confidential and include photographs, prototypes, diagrams and samples.

Except as provided under clause 4 of this section, the Employee agrees not to disclose or otherwise publish the Confidential information without the prior written consent of the Employer.

The Employee agrees not to use the Confidential information for any purpose other than that for which the information was provided, in the case of any uncertainty, the Employee agrees to obtain prior clearance from the Employer.

When disclosure to other employees or agents is necessary the Employee shall ensure that they are bound by equivalent duties of confidentiality and non-use as those set out in this agreement.

The Employee shall take all necessary care to ensure that all materials in his possession which contain or incorporate Confidential information be securely kept and shall return, destroy or otherwise deal with as directed all material containing or incorporating Confidential information on the direction of the Employer.

The Employee's obligations in respect of the Confidential information shall be in addition to any other obligation under any other agreement which involves the Confidential information, unless excluded by reference.

[22] Mr Reid resigned from the Donovan Group with effect from 25 May 2018. It is alleged that on 14 May 2018, Mr Reid "indicated that he intended to resign from his position at Donovan Group in order to take a new direction and face new challenges." The employment agreement provided for two weeks' notice but the Group's directors attempted to negotiate an orderly changeover by which it was suggested Mr Reid should work until the beginning of July 2018, in return for which the cost of a shed, valued at $18,500, would be written off. Mr Reid did not accept the proposal to stay on beyond the expiry of the two-week notice period.

[23] It is alleged that Mr Reid told his employers that the new venture he was establishing was project management focused and did not indicate any intention to set up a business in direct competition with the Donovan Group. Mr Reid reinforced the position that he would focus on what he described as a "project management business" and intended to finish on 1 June 2018. The following day, on 24 May 2018, a director of the Group, Mr K F Donovan, accepted the decision by Mr Reid to terminate his employment on 1 June 2018 and withdrew the incentive of writing off the value of the shed. A few hours later, Mr Reid informed Mr Donovan by email that he would finish the following day (on 25 May 2018) and that his "(k)eys, car, phone etc will all be left at the office." Mr Donovan suggests that the reference to "etc" included the desktop computer provided by the Group to Mr Reid as part of his employment package.

[24] Mr Donovan had declined Mr Reid's request to take his smartphone number with him on his departure, saying it needed to be available to Mr Reid's replacement. Mr Donovan was concerned to ensure also that all of the contact information and access to the company's database would remain available on the device for the new general manager. While he did not say so, he assumed that Mr Reid would not delete information from the phone and expected that it would be returned with databases and access to intellectual property intact.

[25] It is said that on 27 May 2018, Mr Reid began posting messages on social media announcing that he had moved on to "greener pastures" and that he would "continue to be in the construction industry providing expert, unbiased advice for steel buildings from design through to full-turn key projects." He invited inquiries to his new cellphone number and email address.

[26] After Mr Donovan received information that Mr Reid and Mr Waldron were working together, Mr Donovan undertook a Companies Office search and identified that a company, which became SmartSteel, was incorporated on 25 May 2018 by Mr Reid. Mr Donovan also uncovered information establishing that in February 2018, Mr Waldron and Mr Reid had made a joint proposal as "two young up and coming property investors" to purchase a commercial building in Whangarei from Ballance Fertiliser.

[27] A subsequent review of the content of Mr Reid's smartphone and desktop computer revealed that the entire contact details, client database, all historical texts and emails had been deleted from the smartphone and that the client database on Mr Reid's desktop computer and Gmail storage system had been deleted. Mr Donovan said that only some of the database had been retained on the Group's mainframe system.

[28] On 12 August 2018, Mr Reid announced via Facebook the establishment of a new construction company, SmartSteel, identifying himself and Mr Waldron as owners. The following day he sent out an unsolicited generic email containing information which Mr Donovan says, "is effectively an exact copy of the manner in

which Coresteel's operations are set up." Mr Donovan was not able to say to whom the email was sent except that he has been able to establish that a number of Donovan Group customers received it. Those customers have provided the Group with information which is said to confirm that:

[b] they dealt with Mr Reid professionally only in his capacity as a general manager of Coresteel New Zealand Limited;

[29] These customers included three in respect of whom Mr Donovan provided detailed allegations of the projects which had been commenced by the Donovan Group prior to Mr Reid's departure.

[30] It is also alleged that Mr Waldron's company, Waldron Construction and Roofing Limited (WCR), has placed on its website a number of images of Coresteel buildings which, while Mr Waldron's company was a sub-contractor to Coresteel, Mr Waldron continued to display the images notwithstanding objection by the Donovan Group, in circumstances in which it is an available inference that WCR was responsible for the design and building of the buildings shown on the website, something which Mr Donovan maintains is untrue. Furthermore, there is evidence from which Mr Donovan has inferred that WCR has used patented information belonging to Donovan Group to construct a recently built building using Donovan Group's patented joint system.

[31] I was satisfied that the evidence establishes a strongly arguable case that in respect of all three of the Donovan Group customers specifically identified by Mr Donovan, Mr Reid attempted to negotiate, or at least to persuade the customers to consider entering into, contracts between the customers and SmartSteel at prices which would undercut the contract prices negotiated between the customers and Coresteel.

[32] I was satisfied on the basis of the evidence adduced by the plaintiff that there was a strong prima facie case that Mr Reid:

[a] breached his duties of fidelity and good faith as an employee by wilfully destroying information belonging to the Donovan Group, including confidential and commercially sensitive information, which should have remained available to the Group on databases held within and accessed through his smartphone and desktop computer;

[b] intentionally misled his employer about his post-employment intentions by inducing the Group’s directors to believe that he intended to establish a consultancy when, in fact, he intended to establish a business in direct competition with Donovan Group;

[c] unlawfully converted information belonging to Donovan Group, including confidential and commercially sensitive information, to his own use and the use of the other defendants, including information about Donovan Group clients; their key contacts; their contractual arrangements with Donovan Group and the pricing information related to contracts entered into by Donovan Group; and

[d] acted at all material times in concert with Mr Waldron, with the common intention of:

[a] Mr Waldron probably knew, at all material times, that Mr Reid had obtained the Group’s confidential and commercially sensitive information unlawfully;

[b] the Donovan Group had probably suffered loss or harm as a consequence of the unlawful conversion and use of its confidential and commercially sensitive information by the defendants; and

[34] The loss or harm which I find was probably suffered cannot reasonably be proved without further inquiry, including examination of the material seized pursuant to the Court's orders and other evidence, but may be presumed for present purposes to have occurred in one or more of the ways pleaded; namely:

[a] diversion of business away from the Donovan Group as a consequence of members of the public (including past and prospective clients of the Group) purchasing the defendants' products and services;

[d] loss of commercial opportunity to win prospective business; [e] erosion and loss of income;

[g] erosion and damage to the goodwill and reputation of the plaintiff and its products in circumstances where the products of the defendants are inferior to those of the plaintiff.

It is likely that the plaintiff's case will prove to be stronger in some of those categories than in others.

[35] In a Minute issued on 17 October 2018, I indicated to Mr Baird that I sought further assistance on:

[a] whether consideration had been given to the exclusive jurisdiction of the employment institutions under the Employment Relations Act 2000. I said it seemed at that stage that, to the extent that the orders sought by way of interlocutory relief rely on breaches of Mr Reid's employment agreement with the plaintiff, the High Court had no jurisdiction; and

[b] the basis on which equitable obligations of confidence may arise independently of the employment agreement.

[36] Having received further submissions on those matters, I was not persuaded that the Employment Relations Authority did not have exclusive jurisdiction over the first cause of action, which is brought in contract against Mr Reid only. Since I have not heard more fully from the plaintiff, nor at all from any of the defendants, on that aspect, it is not appropriate to do more than explain why I was not prepared to make the orders sought on the basis of the contractual cause of action. It will be a matter for the plaintiff to satisfy the Court in due course, in the interlocutory stages of the substantive proceeding, that the Court has jurisdiction to entertain the plaintiff's claims and to grant the remedies sought in contract for breach of the employment agreement.

[37] So far as I could see, the relevant pleadings in the statement of claim are these:

24. The first defendant entered into an individual employment agreement with the plaintiff dated 3 February 2012. The plaintiff relies on the entire agreement as if pleaded in full herein.

25. The individual employment agreement contains the following express confidentiality clause:²

26. By virtue of his employment at the plaintiff and the terms of his individual employment agreement, Mr Reid owed to the plaintiff:

26.1 An obligation to keep the plaintiff's confidential information and intellectual property and other information that was otherwise confidential and commercially sensitive to the plaintiff, strictly confidential and not to profit from misuse of that information ("obligation of confidence").

FOR A FIRST CAUSE OF ACTION AGAINST THE FIRST DEFENDANT (BREACH OF CONTRACT)

52. The first defendant has acted repeatedly in breach of the terms of the confidentiality clause in his individual employment agreement and his contractual duties to the plaintiff, as pleaded in paragraph 26 above.

[38] In respect of the first cause of action, the Donovan Group pleads that loss and damage has been caused in the manner I have identified. As remedies, it seeks declarations, permanent injunctions and damages.

[39] The Employment Relations Authority (the Authority) is established under the Employment Relations Act 2000.³It is an investigative body that has the role of resolving employment relationship problems by establishing the facts and making a determination according to the substantial merits of the case, without regard to technicalities. ⁴An "employment relationship problem" is defined in the Act as

including, "any ... problem relating to or arising out of an employment relationship".⁵

The definition of “employment relationship” includes, unsurprisingly, a relationship between an employer and an employee employed by the employer.⁶

[40] Section 161 of the Act provides that the Authority "has exclusive jurisdiction to make determinations about employment relationship problems generally, including

... matters related to a breach of an employment agreement".⁷The relevant provisions

[41] As the pleadings make clear, the first cause of action for breach of contract is founded expressly on an allegation that Mr Reid “has acted repeatedly in breach of the terms of the confidentiality clause in his individual employment agreement and his contractual duties" to the Group. It is strongly arguable, therefore, that such a claim falls squarely within the exclusive jurisdiction of the Employment Relations Authority by virtue of s 161(1)(b).

[42] As to remedies, the Employment Relations Authority has jurisdiction, "in any matter related to an employment agreement, [to] make any order that the High Court or a District Court may make under any enactment or rule of law relating to contracts".⁸

[43] A full Court of the Employment Court held, in Credit Consultants Debt Services v Wilson (No. 2) that s 161(1)(b) conferred on the Authority exclusive jurisdiction to make a determination about a claim for damages for breach of an

employment agreement.⁹Moreover, the same full Court held in Credit Consultants Debt Services NZ Ltd v Wilson (No. 4) that the injunctive powers available for the enforcement of employment agreements, which had formerly been conferred upon the Employment Court by the Employment Contracts Act 1991, had been removed to the Authority in the first instance by ss 161 and 162 of the Employment Relations Act.¹⁰

[44] In seeking to persuade me that this Court has jurisdiction to entertain the first cause of action against Mr Reid, Mr Baird referred to and relied upon the judgment of this Court in Pain Management Systems (NZ) Limited v McCallum.¹¹In that case, however, Pankhurst J noted, that “the statement of claim [did] not expressly plead reliance upon the employment contract."¹²For that reason, the High Court did not address the implications of s 162(1)(b).

[45] Mr Baird also relied on the judgment of this Court in BDM Grange Limited v Parker.¹³There, a full Court comprising Baragwanath and Courtney JJ held that the definition of "employment relationship problem" in s 5:¹⁴

... must be read in a limited way to mean any cause of action, the essential character of which is found entirely within the employment relationship itself. This would not encompass claims arising from tortious conduct even if arising between an employer and employee, since the relationship merely provides the factual setting for the cause of action; the duty arises independently.

[46] In that case, however, the High Court was addressing causes of action in tort not, as here, a claim squarely in contract alleging a breach of express, statutory and implied terms of Mr Reid's employment agreement. The Court in BDM Grange considered the employment relationship provided the factual setting for the cause of action founded on a duty said to arise separately.

[47] Given the extremely coercive nature of the relief sought, I would not have granted the interlocutory orders on the basis of the first cause of action, given my view

_{that this Court's jurisdiction in respect of that cause of action is
highly debateable.}

⁹Credit Consultants Debt Services NZ Ltd v Wilson (No. 2) [2007] ERNZ 205 at [15].

¹⁰Credit Consultants Debt Services Ltd v Wilson (No. 4) [2007] ERNZ 446 at [66] – [69].

¹³BDM Grange Limited v Parker [2005] NZHC 515; [2006] 1 NZLR 353, [2005] ERNZ 343 (HC).

[48] Although the alleged breaches of the employment agreement form the background to and basis of the second cause of action against both Mr Reid and the other defendants, I was prepared to accept, for present purposes at least, that the claim in equity was outside the exclusive jurisdiction of the Authority and within the jurisdiction of this Court. That is necessarily so, of course, against the defendants other than Mr Reid who were not parties to the employment agreement.¹⁵

[49] Clearly, this Court has jurisdiction over the tortious claims in the third and fourth causes of action.

[50] I was satisfied there could be no dispute that, in so far as the plaintiff’s substantive claim rested on the second, third and fourth causes of action, this Court was entitled to grant search and preservations orders and injunctions of the kind sought.¹⁶Applying the well-established principles derived from American Cyanamid Co. v Ethicon Limited¹⁷and Klissers Farmhouse Bakery v Harvest Bakeries Limited,¹⁸

[a] Requiring the Group to proceed on notice would cause undue delay or prejudice and that, in the particular circumstances, notwithstanding the highly intrusive nature of the orders, the interests of justice required the application to be determined without notice.

[b] The plaintiff's solicitors and counsel had made reasonable inquiries and taken reasonable steps to provide all relevant material to the Court, including that relating to any defence that might be relied upon by any defendant.

¹⁵Credit Consultants Debt Services NZ Ltd v Wilson (No. 2) [2007] ERNZ 205 at [16] and [62].

Note also Conference of the Methodist Church of NZ v Gray [1996] NZCA 60; [1996] 1 ERNZ 48; [1996] 2 NZLR

¹⁶High Court Rules 2016, rr 7.23, 7.46(3)(a), 7.46(4)(a), 7.53, 7.55 and 33.1-33.9.

¹⁸Klissers Farmhouse Bakery v Harvest Bakeries Limited [1985] NZCA 70; [1985] 2 NZLR 129.

[c] There was a strongly arguable case that Mr Reid had breached his obligations to the Donovan Group and that the second, third and fourth causes of action were seriously arguable, meaning that there were serious questions to be tried.

[d] The balance of convenience favoured the granting of the injunctive relief sought, when comparing the consequences to the plaintiff of the relief being refused and the consequences to the defendants of granting of the relief sought. In particular, I was mindful that the seizure of the material sought would be disruptive and inconvenient for the defendants but, relatively short-lived compared to the risk to the plaintiff of not making the orders; that material evidence would be destroyed or lost and that the plaintiff would be delayed unduly in obtaining information supporting its claim where there was a real risk of continuing harm as a result of what appeared to be strong allegations of breach of duty by its former employee.

[51] I was satisfied that, as is frequently the position in cases of this kind, difficulties in quantifying the losses or harm flowing from proved breaches of Mr Reid's obligations and the misuse of confidential information by all of the defendants means that damages would not be an adequate remedy.

[52] To the extent that the defendants might be in a position to prove that the plaintiff's claims are unjustifiable and that the defendants have thereby suffered losses for which they should be compensated, I was satisfied that the undertakings provided by the plaintiff would adequately assure the defendants of their ability to recover damages for any such losses in due course.

[53] Finally, I was mindful that, given the plaintiff's proposals for the execution of the orders sought and the undertakings given by those charged with the responsibility for carrying out the Court's directions, the purpose of the without notice orders was to preserve the seized property and to provide the plaintiff with what would be a form of

discovery, rather than to permanently disadvantage the defendants commercially or to give the plaintiff any unfair advantage in the litigation.¹⁹

¹⁹See, similarly, Greymouth Holdings Ltd v Jet Trustees Limited HC Auckland CIV-2011-404-5309,

High Court of New Zealand Decisions

Donovan Group NZ Limited v Reid [2018] NZHC 2854 (5 November 2018)