Janala Pty Ltd v Hardaker (No 2)

1. [1]

   Application is made by the defendants by a notice of motion dated 25 August 2022 to set aside a subpoena issued by the plaintiff to GPI (General) Pty Ltd t/a PFM Corp (PFM) on 10 August 2022 and paragraph 3 of the notice to produce served by the plaintiff on the first defendant on 10 August 2022. The subpoena and notice to produce are directed to obtaining communications between Mr Hardaker, the first defendant, and customers of the plaintiff, including EverX Pty Ltd (EverX) and Business Relocation Consulting Pty Ltd (BRC), after termination of his employment with the plaintiff in April 2022.

Background

1. [2]

   These proceedings concern the enforceability of post-employment restraints contained in the employment contract Mr Hardaker entered into with the plaintiff on 17 November 2014 (Employment Contract) and in an undertaking he signed on 2 February 2022 (Undertaking). On 17 June 2022 the Court made interlocutory orders which inter alia restrained Mr Hardaker from working for a competitor of the plaintiff except PFM in a limited capacity referred to as the “warehouse proposal”: Janala Pty Ltd v Hardaker [2022] NSWSC 822 at [3], [67] and [74]. The final hearing is set down for 3 days commencing on 5 October 2022.

2. [3]

   On 10 August 2022, the plaintiff applied to the duty judge for leave to file in Court a notice of motion dated 9 August 2022 seeking the variation of the interlocutory orders and for leave to issue the subpoena and notice to produce. In the hearing before Lindsay J, as duty judge, senior counsel for the plaintiff informed the Court that “the documents that are sought are sought urgently for the purposes of the application on the motion.” Lindsay J made orders granting the leave sought. Ultimately, on 15 August 2022, with the consent of the defendants, the variation to the interlocutory orders sought in the notice of motion were made. This has the effect of preventing Mr Hardaker from working for PFM in any capacity in the period to the conclusion of the final hearing.

3. [4]

   In the meantime, on 12 August 2022, the plaintiff filed a notice of motion charging Mr Hardaker with contempt on the basis that he had breached the orders made by the Court on 17 June 2022. Mr Hardaker personally attended Court on 15 August 2022 at which he admitted breach of the interlocutory orders and made an apology to the Court through his senior counsel. The issue of penalty has been deferred until the conclusion of the proceedings.

4. [5]

   On 22 August 2022 the plaintiff was granted leave, with the defendants’ consent, to file an amended statement of claim which contained new sections headed “Ongoing conduct: 20 July 2022 email from EverX Pty Ltd” and “Ongoing conduct: 20 July 2022 email to Business Relocation Consulting Pty Ltd” which alleged that Mr Hardaker had in the period after the cessation of his employment with the plaintiff solicited EverX and BRC, both of which are customers of the plaintiff, in breach of the restraint clauses in his Employment Contract and the Undertaking. The particulars of these allegations were identified as two emails: (1) an email dated 20 July 2022 from Mr Hardaker to “sydneyunique@bigpond.com” which is an email address for BRC (a customer of the plaintiff), and (2) an email dated 20 July 2022 from EverX (a customer of the plaintiff) to two employees of the plaintiff which was copied to Mr Hardaker. These two emails are referred to in the subpoena (see below).

5. [6]

   On 25 August 2022 the defendants served their defence to the amended statement of claim which admitted each allegation pleaded in the new sections of the amended statement of claim.

6. [7]

   Also on 25 August 2022 the defendants wrote to the plaintiff inviting it to withdraw the subpoena which invitation was rejected. The defendants then filed the notice of motion which is now before the Court. In the defendants’ written submissions in support of the motion, the defendants accept that they do not and will not take any point at trial that the Court should in the exercise of its discretion, refuse to enforce the restraints should they be valid. Accordingly, in the event that the Court determines at the final hearing that the restraints are valid no discretionary defence will be advanced by the defendants against the granting of final injunctive relief.

Documents sought

1. [8]

   The documents sought by the subpoena fall into 12 categories as follows:

2. [9]

   In essence, paragraphs 1 and 5 are the two emails referred to at [5] above copies of which the plaintiff has already obtained. Paragraphs 2 and 6 seek replies to those emails or documents relating to them. Paragraphs 3 and 4 seek documents relating to the warehouse proposal. Paragraphs 7 and 9 seek communications between PFM and EverX and BRC regarding the provision of services by PFM to those entities during the period of Mr Hardaker’s employment with PFM and paragraphs 8, 10 and 11 seek internal PFM communications relating to the provision of such services. Paragraph 12 seeks communications during the period of Mr Hardaker’s employment with PFM between him and any “current or potential” clients of PFM (not the plaintiff).

3. [10]

   The notice to produce identifies 10 categories of documents in substantially the same form as paragraphs 1-3, 5-8 and 10-12 of the subpoena. On 22 August 2022 the Court, by consent, stood over until the final hearing of the matter all paragraphs of the notice to produce except paragraph 3 which is materially the same as paragraph 3 of the subpoena.

Principles

1. [11]

   It is common ground that a subpoena is liable to be set aside where it lacks a legitimate forensic purpose, i.e. the documents sought lack apparent relevance to the issues in the proceeding, and the party issuing the subpoena bears the onus of establishing the apparent relevance of the documents sought. To establish that the documents sought under a subpoena are “apparently relevant”, the issuing party is required to show that it is likely (or “on the cards”) that the documents sought to be produced will materially assist on an identified issue or there is a reasonable basis beyond speculation that it is likely (or “on the cards”) that the documents subpoenaed will so assist: Secretary of the Department of Planning, Industry and Environment v Blacktown City Council [2021] NSWCA 145 at [65] per Bell P (McCallum JA agreeing) and [89] per Brereton JA. As that decision establishes, it is not necessary that the material assistance that the subpoenaed documents would be likely to afford is material assistance to the case of the party that issued the subpoena: at [80], [90].

2. [12]

   Bell P (as his Honour then was) added at [68] that:

3. [13]

   In the present case the plaintiff relied on the pleadings to support the apparent relevance of the categories of documents sought under the subpoena. As I understood the plaintiff’s argument, the subpoena was said to be relevant to the issue of whether the restraints in the Employment Contract and the Undertaking were reasonable to protect the confidential information and goodwill of the plaintiff, in particular because during Mr Hardaker’s employment with the plaintiff he developed and maintained personal relationships with and influence over the plaintiff’s customers: see paragraphs 15 and 56–59 of the amended statement of claim.

4. [14]

   As the parties were not in agreement as to the extent to which subsequent events are relevant to the validity of a restraint, it is necessary to deal with the authorities in a little detail.

5. [15]

   It is not in dispute that the date for determining the validity of the restraint and in particular whether the restraint is no wider than is reasonably necessary to protect the employer’s legitimate business interests, is the date the restraint was entered into: Lindner v Murdock’s Garage (1950) 83 CLR 628 at 638 per Latham CJ and 653 per Kitto J; [1950] HCA 48; Amoco Australia Pty Ltd v Rocca Bros. Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 318 per Gibbs J; [1979] HCA 42. What is in dispute is the extent to which events after the date the restraint was entered into can be taken into account.

6. [16]

   The authorities establish three propositions relevant to this question: (1) the reasonableness of the restraint is determined by reference to the circumstances at the date the restraint was entered into including what was foreseeable in the future at that time; (2) facts occurring after the restraint was entered into are relevant where they throw light on the circumstances existing at the time the restraint was entered into; and (3) the reasonableness of a restraint is to be tested not by reference to what the parties have actually done under it but rather by what the terms of the contract entitle or require them to do: see J D Heydon, The Restraint of Trade Doctrine (4th ed, 2018, LexisNexis Butterworths) at 48-50.

7. [17]

   In relation to the first proposition, in Lindner Kitto J said at 653 (emphasis added):

8. [18]

   As is clear from this passage, in assessing reasonableness at the date the restraint is entered into the court may take into account, as Salter J said in Putsman v Taylor, “the best estimate which [the parties] could then make of the future” or, to put it another way, the future probabilities which could have been foreseen (see ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640 at 671). The full statement by Salter J on this topic in Putsman v Taylor [1927] 1 KB 637 at 643 was as follows:

9. [19]

   The plaintiff sought to rely on the last two sentences as indicating that the court could have regard to the actual performance and conduct of the parties in assessing the reasonableness of the restraint because it was necessary to do so in order to assess the best estimate which the parties could make of the future. It is significant that it was only the first two sentences of this passage which Kitto J adopted with approval in Lindner and not the last two, and I have been unable to locate any authorities which approve the last two sentences. A leading text concludes that the last two sentences are incorrect because they are inconsistent with the established principle that a restraint is invalid ab initio or valid ab initio, and a restraint which is initially unenforceable cannot become enforceable due to the way it operates in changed circumstances, and vice versa: see J D Heydon, The Restraint of Trade Doctrine at 50-51 and the cases there cited including Gledbow Autoparts Ltd v Delaney [1965] 1 WLR 1366 at 1377 per Diplock LJ. No authority has been brought to my attention which doubts the correctness of that criticism.

10. [20]

    The kinds of matters which might be relevant as being future probabilities which could have been foreseen at the date the restraint was entered into were identified by Sackar J in Employsure Ltd v McMurchy [2021] NSWSC 1179 as follows:

11. [21]

    One of the cases cited by Sackar J is Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9; [2006] NSWSC 717 at [37] where Brereton J accepted that a relevant matter is the prospect at the date the restraint is entered into that the employee will be promoted to positions of greater responsibility as an ordinary incident of his employment.

12. [22]

    The plaintiff relied on two authorities (in addition to Putsman v Taylor) in support of a broader proposition that the court can have regard to future events that could have been foreseen rather than merely what was foreseeable as to the future at the relevant date. The first is Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343; [2018] NSWCA 163 where Gleeson JA (with whom Bathurst CJ and Beazley P agreed) said (emphasis added):

13. [23]

    The sentence in bold needs to be read in context. In my opinion, what his Honour was referring to is the proposition that in assessing reasonableness at the date the restraint is entered into the court may take into account future probabilities which are foreseeable at that time, given that the authority cited is the statement of Kitto J in Lindner to that effect. (The final sentence is not relevant in the present context because the first defendant accepts that if the restraint is valid, there are no discretionary factors which would weigh against the grant of declaratory relief.)

14. [24]

    In all of these cases where future probabilities are taken into account, the focus is on what was foreseeable as to relevant future events at the time the restraint is entered into. The future events that actually occur are only relevant in so far as they support an inference as to what was foreseeable at the date the restraint was entered into: see [28] below and BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105; [2010] NSWCA 347 at [49].

15. [25]

    The plaintiff also relied on the observations of Sheppard J in Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242 at 246-247. The only part of his Honour’s judgment relevant to the present issue is the following passage at 247:

16. [26]

    I agree with the defendants that this passage does no more than recognise that in assessing the reasonableness of the restraint it is necessary to have regard to the likely or potential effect of the restraint on the employee (or other person restrained) assessed at the time the restraint is entered into, and does not support the proposition that subsequent events are relevant to the question of validity in a manner inconsistent with the three propositions stated at [16] above. It is clear from what Sheppard J said at 246 that he was in agreement with the substance of the reasons of Gummow J at 285-286 which set out the limited relevance of subsequent events to the validity of a restraint of trade.

17. [27]

    The second proposition stated at [16] above has its genesis in the observation of Gibbs J in Amoco at 318 where he said (emphasis added):

18. [28]

    It is apparent that Gibbs J contemplated that events after the date the restraint was entered into may, but need not, throw light on the circumstances at the relevant date: McHugh v Australian Jockey Club Ltd [2014] FCAFC 45; (2014) 314 ALR 20 at [4(h)]. As J D Heydon, Heydon on Contract (2019, Thomson Reuters) at [19.140] points out, the way in which subsequent events can be relevant to the position at an earlier point in time is through a process of retrospectant circumstantial inference. J D Heydon, Cross on Evidence (13th Australian ed, 2021, LexisNexis) explains at [1170] that retrospectant evidence is a type of circumstantial evidence in which the later occurrence of an act, state of mind or state of affairs justifies an inference that an act was done or the state of mind or state of affairs previously existed. This is potentially relevant in the context of a restraint in at least two ways.

19. [29]

    First, where a party seeks to establish the reasonableness of a restraint, or lack thereof, by reference to what was foreseeable at the date the restraint was entered into, “evidence of the later occurrence of an event can be probative of an earlier probability of that event occurring”: Paciocco v Australia & New Zealand Banking Group Ltd (2015) 258 CLR 525; [2016] HCA 28 at [169] per Gageler J (said in a different context but equally applicable here). For example, if it is sought to establish that despite the fact that the employment contract is determinable by the employer on one month’s notice a longer period of employment was probable when the contract was made, the actual period of the employment may throw light on that matter: McPherson v Moiler (1920) 20 SR (NSW) 535 at 541.

20. [30]

    Second, communications between the employee and the employer’s customers after the restraint is entered into could potentially support a retrospectant circumstantial inference as to the nature of the personal relationship between the employee and the employer’s customers at the earlier time when the restraint was entered into: see, e.g. Metcash Ltd v Jardin (No 3) [2010] NSWSC 1096; 273 ALR 407 at [52] (affirmed on appeal in Jardin v Metcash Ltd [2011] NSWCA 409; 285 ALR 677 at [87]-[107]). These communications could either support the inference that the employee has influence over the employer’s customers’ propensity to give their custom which would point to the conclusion that the restraint is reasonable or, conversely, that the employee does not have such influence which would point the other way. Given that a contractual restraint which is an unreasonable restraint of trade has no legal effect and is treated as if it was not in the contract, the trial judge was obliged to determine that question irrespective of whether the employee’s conduct after the contract was made was illegal: see Cedar Hill Flowers at [35]-[37].

21. [31]

    The third proposition stated at [16] above is a consequence of the requirement that the validity of a restraint is determined at the date it was entered into. It does not conflict with the second proposition as is evident from observations of Gummow J in Adamson v NSW Rugby League Ltd (1991) 31 FCR 242. The issue in that case was whether rules of the New South Wales Rugby League which established a system called an “internal draft” were an unreasonable restraint of trade. The rules set out a mandatory procedure to be followed by the clubs and players whose contracts with a particular club had come to an end which determined which club the player would then be permitted to play for regardless of that player’s own preference. After referring to the observation of Gibbs J in Amoco quoted at [25] above Gummow J said at 285 (emphasis added):

22. [32]

    There is a clear recognition in the highlighted sentence that Gibbs J’s observation in Amoco sits comfortably with the requirement not to have regard to what the parties have actually done.

23. [33]

    An application of the third proposition is that subsequent conduct of the employee in breach of the restraint is irrelevant to the determination of its validity. In Cedar Hill Flowers & Foliage Pty Ltd v Spierenburg (2002) 1 Qd R 482, [2002] QCA 348, Williams JA (with whom the other members of the Court agreed) said at [25]:

24. [34]

    This statement was adopted by McMurdo J in AGA Assistance Australia Pty Ltd v Tokody [2012] QSC 176; 224 IR 219 as follows at [28]:

25. [35]

    It is important to recognise the context in which Williams JA made the statement set out at [33] above. The case involved an employee who had, while employed by the plaintiff, breached his obligations to the plaintiff under a restraint in his employment contract by secretly setting up a partnership business in competition with the plaintiff. That business involved the sale of an Australian native plant harvested in Queensland which was illegal because the employee had failed to obtain the necessary licences. The plaintiff sought to enforce the contractual restraint by injunction. It succeeded at first instance because the trial judge considered that the restraint of trade doctrine could not be invoked by the employee to attack the enforceability of the contractual restraint in respect of conduct which was illegal.

26. [36]

    On appeal, it was held that the trial judge had erred in failing to consider whether the restraint was reasonable at the time it was entered into, which was a question unaffected by whether the employee had appropriate licences to carry on the competing business. Given that a contractual restraint which, at the time it is entered into, is an unreasonable covenant in restraint of trade is void and unenforceable, the trial judge was obliged to determine that question irrespective of whether the employee’s conduct after the restraint was entered into was illegal: see Cedar Hill Flowers at [35]-[37].

27. [37]

    The reasoning in Cedar Hill Flowers and AGA Assistance Australia reflects the third proposition stated above. The reason why subsequent conduct by the employee asserted by the employer to be in breach of a restraint is generally irrelevant is that the mere fact of such conduct by the employee cannot assist the Court in the determination of whether the restraint when entered into satisfied the test for validity. However, nothing said in either Cedar Hill Flowers or AGA Assistance Australia suggests any qualification was intended to either the first or second proposition stated in [16] above.

28. [38]

    The defendants submitted that the only exception to the principle that subsequent conduct of the parties is irrelevant to the validity of the restraint is the first proposition stated at [16] above. In particular, it was submitted that the subsequent conduct would only be relevant if it went to the issue of the parties’ expectations, at the time of contracting, as to the likely future development of the employee’s role or responsibilities within the employee’s business. In my opinion, that submission is not correct because it overlooks the exception recognised by Gibbs J in Amoco that facts which have occurred since the date the restraint was entered into may throw light on the circumstances existing at that date. Evidence of subsequent events which throw light on the circumstances existing at the date the restraint was entered into, assuming they are circumstances relevant to the question whether the restraint goes no further than is reasonably necessary to protect the legitimate business interests of the employer, would be admissible on that question. That would be so even if those events involved conduct of the employee in breach of the restraint.

Consideration

1. [39]

   As noted above, the ostensible purpose of the issue of the subpoena was to obtain documents to support the notice of motion dated 9 August 2022 which was an application to vary the interlocutory injunction granted on 17 June 2022. Ultimately that relief was granted on 15 August 2022. The plaintiff now seeks to support the 12 categories of documents sought in the subpoena on a different basis which is that they have apparent relevance to the validity of the restraints contained in the Employment Contract entered into in November 2014 and the Undertaking which was signed on 2 February 2022.

2. [40]

   Clearly, paragraphs 3 and 4 cannot be supported on this basis as they relate only to the warehouse proposal. What is said below addresses the remaining 10 categories of the subpoena.

3. [41]

   In relation to the remaining categories, the defendants contended that none has any legitimate forensic purpose because subsequent conduct of Mr Hardaker in breach of the restraints is irrelevant to the validity of the restraints.

4. [42]

   The plaintiff sought to support the subpoena in two alternative ways. First, the plaintiff contended that the documents sought by the subpoena throw light on conduct that could have been foreseen at the time the Employment Contract and the Undertaking were entered into and thereby bear upon the reasonableness, validity and enforceability of the constraints. In my opinion, this is not a basis supported by the authorities for bringing in evidence regarding subsequent events, for the reasons given above.

5. [43]

   Second, the plaintiff contended that each of the categories of documents sought in the subpoena would elicit documents which indicated the nature of the relationship of Mr Hardaker with the plaintiff’s customers during his employment with the plaintiff and that was relevant to whether the restraints in the Undertaking were valid (it being accepted, as I understood it, that the same could not be said for the restraints in the Employment Contract given that it was entered into 8 years earlier). It was submitted that a relevant matter to the reasonableness of the restraint is whether Mr Hardaker had become the “human face” of the business of the plaintiff, and the documents sought by the subpoena have a “sufficient apparent connection” as to whether and the extent to which Mr Hardaker was the “human face” of the plaintiff at that time (2 February 2022).

6. [44]

   One of the legitimate business interests which the plaintiff may protect by a restraint is its customer connection (i.e. goodwill). In some of the authorities the necessary relationship is described as one in which the employee is the “human face” of the employer to indicate that the employee must represent the business to the customer and have some control over the customer’s propensity to deal with the employer. Perram J summarised the relevant principles in Informax International Pty Ltd v Clarius Group Ltd (2011) 192 FCR 210; [2011] FCA 183 as follows:

7. [45]

   See also Jardin v Metcash Ltd [2011] NSWCA 409; 285 ALR 677 at [95]-[97] where the relevant criterion is expressed in terms of a personal relationship between the employee and the customer which gives the employee an ability to influence the customer.

8. [46]

   In my opinion it is likely (or on the cards) that communications between Mr Hardaker and one or more of the plaintiff’s customers in a period relatively soon after the Undertaking was signed in February 2022 will assist on the question whether Mr Hardaker was the “human face” of the plaintiff’s relationship with that customer when it was signed, particularly as Mr Hardaker only continued to work for the plaintiff for around two months after that time. The tenor of those communications is likely to provide a basis for an inference, one way or the other, on the question whether at the time the Undertaking was signed, Mr Hardaker could be said to control or influence the customer’s business dealings with the plaintiff. Either way, that would have the potential to materially assist on the question of whether the restraints in the Undertaking were, when given, valid. While it may be true, as the defendants submitted, that the plaintiff has access to internal emails comprising correspondence with customers more proximate in time to the date the Undertaking was signed, “evidence can be relevant even though it may be unnecessary in the sense that other evidence to the same effect is tendered”: J D Heydon, Cross on Evidence, [1490]. Ultimately, of course, whether the documents produced in response to the subpoena are relevant will be a matter to be determined at the time of the tender.

9. [47]

   For these reasons, I agree with the plaintiff’s submission that there is a legitimate forensic purpose in seeking the documents in paragraphs 1, 2, 5, 6, 7 and 9 of the subpoena.

10. [48]

    I agree with the defendants’ submission that paragraphs 3, 4, 8, 10, 11 and 12 of the subpoena fall within the exclusionary principle stated in Cedar Hill Flowers set out at [33] above. Put another way, none of those categories in the subpoena is likely to throw light on the circumstances existing at the date on which the restraints were entered into in a manner relevant to the reasonableness of the restraints.

11. [49]

    The defendants also submitted in the alternative that the subpoena should be set aside on case management grounds. I have considered carefully the reasons given in support of that submission and reject it on the basis that first, paragraphs 1, 2, 5, 6, 7 and 9 of the subpoena are relatively confined and do not in my view expand the issues in the proceedings; and second, I was informed that PFM had previously indicated its preparedness to comply with the subpoena and has not suggested that it would be oppressive for it to comply.

Conclusion

1. [50]

   In my view, for the reasons given above, paragraphs 1, 2, 5, 6, 7 and 9 of the subpoena should not be set aside, and paragraphs 3, 4, 8, 10, 11 and 12 of the subpoena and paragraph 3 of the notice to produce should be stood over until the conclusion of the hearing of the validity of the restraints.

2. [51]

   In relation to costs, I note that the parties did not make submissions on costs at the hearing of the motion. I indicate that my preliminary view is that as each party has had some success, the appropriate order is that costs be in the cause but if either party wishes to press for a different order they should notify the Court by 5pm Wednesday, 14 September 2022 by email to my associate of the costs order they seek and send by email to my associate written submissions of no more than two pages by 5pm on Thursday, 15 September 2022. If no party seeks any other order as to costs, I will make final orders on Thursday, 15 September 2022 including that costs be in the cause.