Label Manufacturers Australia Pty Ltd v Chatzopoulos (No 2) [2022] NSWSC 1518

Supreme Court New South Wales

Medium Neutral Citation: Label Manufacturers Australia Pty Ltd v Chatzopoulos (No 2) [2022] NSWSC 1518 Hearing dates: On the papers; final submissions 25 October 2022 Date of orders: 9 November 2022 Decision date: 09 November 2022 Jurisdiction: Equity - Expedition List Before: Parker J Decision: See [21] Catchwords: COSTS – restraint of trade proceedings – application for special costs order – informal offer of compromise before commencement of proceedings – whether rejection of offer unreasonable – expedited case – claims failed on the evidence at trial – special costs order refused Legislation Cited: Restraints of Trade Act 1976 Cases Cited: Karpin v Gough (No 2) [2022] NSWSC 682 Label Manufacturers Australia Pty Ltd v Chatzopoulos [2022] NSWSC 1059 Category: Costs Parties: Label Manufacturers Australia Pty Limited (Plaintiff) Jim Chatzopoulos (Defendant) Representation: Counsel: A Guy (Plaintiff) CP O'Neill (Defendant)

Solicitors: Vincent Young (Plaintiff) Macpherson Kelley Pty Limited (Defendant) File Number(s): 2022/202453 Publication restriction: Nil

Judgment 1. On 29 July, I made orders orally which disposed of these proceedings. I dismissed the plaintiff's claim and ordered the plaintiff to pay the defendant's costs on the ordinary basis. Pursuant to leave granted to the defendant on that occasion, the defendant has now applied for a special costs order. That application is the subject of this judgment. 2. I delivered formal reasons for my decision on 6 September: Label Manufacturers Australia Pty Ltd v Chatzopoulos [2022] NSWSC 1059. This judgment assumes familiarity with my judgment, the paragraphs of which are referred to in this judgment as "J1". 3. The background to the proceedings is set out at J1 [18]-[56]. For present purposes, it is enough to say that the plaintiff ("LMA") is the former employer of the defendant, Mr Chatzopoulos. LMA employed Mr Chatzopoulos as its Chief Executive Officer from March 2018 until June 2021, when he was placed on "gardening leave". His employment formally ended in December 2021. These proceedings began after Mr Chatzopoulos informed LMA, in June of this year, that he proposed to accept employment as the managing director of a company whose business competes with LMA's. 4. The employment contract between LMA and Mr Chatzopoulos was an informal one, being set out in a letter. There was a dispute about whether the letter, on its proper construction, picked up the restraint covenants in a formal employment contract with a related company which had originally employed Mr Chatzopoulos. I concluded that it did. 5. The restraints in question involved covenants against: 1. being employed in a competing business (clause 11.2(a); J1 [82]); 2. soliciting "Business Contacts" including not only customers but also suppliers, service providers etc. (clause 11.2(b); J1 [84]); 3. soliciting Prospective Business Contacts (clause 11.2(c); J1 [84]); and 4. soliciting employees and other personnel (clause 11.2(d); J1 [84]). 1. At the trial, the main debate concerned the non-competition clause. I concluded that the restraint was unreasonable and could not be enforced even if it were applicable (there was a potential dispute about the application of the Restraints of Trade Act 1976). I also concluded that the non-solicitation restraints sought (which were narrower than the covenants) were unreasonable. 2. The present application arises out of negotiations between the parties before proceedings were instituted. On 1 June this year, Mr Gooch, the solicitor for Mr Chatzopoulos, wrote to LMA seeking consent for Mr Chatzopoulos to work for the competitor (J1 [54]). That was refused. On 6 July, Mr Gooch wrote to the solicitors for LMA making an offer to avoid litigation. Under the terms proposed: 1. LMA would waive its rights under the non-competition covenant; 2. Mr Chatzopoulos would comply with the covenants against solicitation of Business Contacts (excluding those he had no dealings with in the twelve months prior to his termination) and employees for a period up to and including 20 December 2023; 3. Mr Chatzopoulos would pay LMA $40,000 in three equal monthly instalments. 1. The offer was open for acceptance until 5.00 pm the following day, 7 July. At 11.46 am in the morning of that day the solicitors for LMA rejected the offer and made a counter-offer. The counter-offer accepted the waiver of rights for the non-competition clause; required compliance with clauses 11.2(b), (c) and (d); and proposed payment of $119,200 in three equal instalments. 2. The counter-offer was expressed to be open for acceptance until 9.00 am the following day, 8 July. Shortly before then, it was rejected. Proceedings were commenced on 11 July. 3. Counsel for Mr Chatzopoulos submitted that the offer clearly involved a compromise. This was not disputed by counsel for LMA. 4. It was common ground that in order to obtain a special costs order based on an informal offer of compromise, such as that in the present case, the offeror must demonstrate that the refusal of the offer was unreasonable. The question was whether this had been demonstrated in the present case. 5. The fact that an offer proves to have been more favourable to the offeree than the ultimate result of the case does not necessarily establish that the rejection was unreasonable. It is necessary to look at the circumstances of the case at the time the offeree failed to accept the offer (see, eg, Karpin v Gough (No 2) [2022] NSWSC 682 at [41] per Ward CJ in Eq). 6. In my view, there are two points of significance in the present circumstances. The first is the issue which was presented for decision at the hearing. Counsel for LMA quoted the following summary of my reasons at J1 [144]: In the end, I was not satisfied that LMA had demonstrated the existence of any recognised interest which would justify the continuation of the restraint for a longer period than seven months. Accordingly, even if the covenants could be read down in accordance with the Restraints of Trade Act, LMA did not establish that their continued application to Mr Chatzopoulos would be reasonable. LMA's case had to fail for this reason. 1. Counsel submitted that I had found that a restraint for up to seven months was reasonable. That is an overstatement. But it is true that all I was concerned with at the hearing was whether an injunction should be granted for the future. I did not have to decide whether some period of restraint of less than seven months would have been reasonable. 2. The second, and related, point involves looking at the reasoning behind my decision. The justification for an employee restraint is usually based on the need to protect two interests of the employer. One is retaining the confidentiality of information provided to the former employee during the employment. The other is in preventing unfair competition by making use of the customer connection developed by the employee during the employment. In this regard, it is common to ask how much time is necessary for the employer to recruit and train a replacement employee (see J1 [137]). 3. In the present case, I found that there was a lack of evidence that the information provided to Mr Chatzopoulos as Chief Executive Officer was of the type that would still be current seven months after the termination of his employment (J1 [142]). I also found that there was a lack of evidence that finding a replacement would take as long as a period of seven months (J1 [138]-[140]). It was these findings which resulted in my conclusion that LMA had failed to prove that a restraint for longer than seven months was reasonable. 4. Thus, LMA's claim did not fail because the restraint went beyond the scope of what was reasonable. Rather, LMA's failure was evidentiary. There was simply a lack of evidence at the trial to establish its position. 5. The offer in question was made before the proceedings had even begun. There is nothing to show that, at that early stage, LMA's failure was pre-ordained. Still less is there anything to show that LMA and its advisors should have realised that failure was pre-ordained. 6. I also think it is relevant that the present proceedings were expedited. The parties co-operated to bring the trial before the Court in only a matter of weeks. The time pressures imposed by expedition may have meant that the evidence was not as extensive as it otherwise might have been. In my view the Court should be especially careful in such a case not to determine the reasonableness of the parties' conduct in hindsight by reference to forensic outcomes at the trial. The efficiency shown in the conduct of these proceedings should be encouraged rather than penalised. 7. In my view, the claim was an entirely proper one. It has not been demonstrated that LMA's rejection of the offer of 6 July was unreasonable. Mr Chatzopoulos' application for a special costs order fails. 8. The orders of the Court are: 1. Order that the defendant's application for a special costs order be dismissed. 2. Order that the defendant pay the plaintiff's costs of the application.