LAPORTE GROUP AUSTRALIA LTD v VATSELIAS SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL GLEESON CJ, CLARKE and MEAGHER JJA 10, 11 December 1992, 9 February 1993 [1993] NSWCA 156 RESTRAINT OF TRADE — INTERFERENCE WITH CONTRACTUAL RELATIONS — ABUSE OF CONFIDENTIAL INFORMATION — the appellants brought proceedings arising out of the setting up, by former officers of the appellant, of a rival business — they claimed the conduct of the respondents was in breach of a covenant in restraint by trade or, in the case of other respondents, amounted to the tort of interference with contractual relations and that the new business involved an abuse of confidential information belonging to the old business — the grounds of appeal were based mainly on errors of fact said to have been made by the trial judge and erroneous inferences as to the nature and scope of the arrangements relating to the new business — HELD — the challenges to the factual findings had been made good and therefore the scope of the relief that had been granted to the appellants at first instance should be widened. Gleeson CJ The appellant company, the plaintiff before Young J in the Equity Division, sought injunctive relief and damages against the various respondents, alleging breaches of contract, wrongful interference with contractual relations, and misuse of confidential information. The appellant succeeded to a certain extent, but that success was relatively limited, and it brings this appeal seeking to widen the relief granted to it. The respondents are a number of persons who were formerly associated with a business acquired by the appellant, and companies controlled by those persons. It is alleged that the respondents set up a rival business and that, in so doing, the first respondent, Mr Vatselias, was in breach of an agreement restricting his activities after leaving the business acquired by the appellant. It is also alleged that the other individual respondents induced him to act in breach of his contract, and that all the respondents made improper use of trade secrets of the appellant. As to the claim of breach of contract, Young J held that Mr Vatselias was (for a period expiring in June 1993) bound by an agreement not to hold any interest in a business competitive with the appellant's business. His Honour also held that, for a closed period ending on a date in February 1991, Mr Vatselias relevantly held an interest in the new business that was set up in competition with the appellant. However, his Honour found that, as from the date in February 1991, Mr Vatselias no longer held such an interest. He attributed the change in circumstances to the commencement by the appellant, in December 1990, of these proceedings. Therefore his Honour declined to grant injunctive relief on the ground that there was no continuing breach, and he referred the matter to the Master to determine the damages for the breach that occurred during the closed period. One of the major issues in the appeal is a challenge to the finding that the interest of Mr Vatselias in the competitive business came to an end in February 1990, a finding which was of importance to the relief granted. Young J dismissed the claim that there had been wrongful interference with contractual relations. The reason for that will appear below. As to the claim that there was misuse of confidential information or trade secrets, his Honour found 2 UNREPORTED JUDGMENTS that certain of the respondents had misused trade secrets of the appellant, but once again, for reasons that will be examined in detail below, granted only very limited relief. In relation to this aspect of the matter there is a cross-appeal challenging the finding that there was misuse of confidential information. The disputed facts in the case relate principally to arrangements that were made between the various respondents in the second half of 1990, and in early 1991. Those arrangements concerned a business known as "Architectural and Structural Adhesives" (ASA) which commenced operating in about September 1990. That was the business that was set up in competition with the appellant. In order to explain the issues that arose it is necessary to make some reference to the background to the events of 1990. Background: Mr Vatselias, who is an industrial chemist, has been involved since 1962 in the production and sale of building adhesives. In 1972 he and Mr Drysdale formed a company named Davco Pty Ltd which went into the business of developing, producing and selling ceramic and vinyl tile adhesives and other building products. They were joined in 1979 by a Mr White. Young J described Mr Vatselias as "the key man" of the business, and Mr Vatselias gave evidence that between 1972 and 1986 he was responsible for all facets of the business of Davco Pty Ltd, including the financial, marketing, technical, sales, product development and entrepreneurial aspects. He was a prominent person in the adhesives industry. In 1986 the appellant purchased the business of Davco. Davco changed its name to Dalias Pty Ltd, and remained under the control of Mr Vatselias. Dalias is the ninth respondent. The second respondent, Mank Australia Pty Ltd, is also a company controlled by Mr Vatselias. Mr Vatselias remained in the employment of the appellant, although in 1987 his capacity changed from an executive to a consultant. He was not required to devote the whole of his time to the appellant's business, and he started up (without any complaint by the appellant) a company which engaged in the business of manufacturing and distributing carpet accessories, including adhesives. That business was referred to as the Kanela business. In June 1989 a company associated with the appellant purchased from Mr Vatselias the Kanela business and, at the same time, Mr Vatselias and Mank entered into an agreement, described as a Consultancy Agreement, pursuant to which they covenanted not to be associated with or have an interest in any business in competition with the appellant. The relevant provisions of the Consultancy Agreement were in the following terms: "7.1 The Consultant and the Executive hereby covenant and undertake jointly and severally that they shall not within Queensland, New South Wales, Victoria, Western Australia, South Australia, Northern Territory, Tasmania, Papua New Guinea, New Zealand, Singapore, Malaysia, Indonesia, Fiji, Philippines, Taiwan, Korea, Japan or China for a period of: (i) 36 months; or failing that (ii) 30 months; or failing that (iii) 24 months; or failing that (iv) 18 months; or failing that (v) 12 months; or failing that (vi) 6 months: from the termination of the Consultancy (however caused) solely or jointly with any other person, whether as principal, agent, director, executive officer, employee, shareholder, partner, joint venturer, member, adviser, consultant or URJ LAPORTE GROUP AUSTRALIA LTD v VATSELIAS (Gleeson CJ) 3 otherwise howsoever, directly or indirectly, carry on, be engaged, concerned or interested in (except as the holder of not more than 5% of the issued capital of any company whose shares are listed on a recognised stock exchange) or otherwise associated with any trade or business in competition with any business carried on by the Davco Division (or by any subsidiary or other Division of the Company to which consultancy services were provided) at the date of termination of the Consultancy. This restraint shall not include retail supply in competition with the Davco Division or other Division or the Company which consent shall not be unreasonably withheld. 7.2 Without limiting the generality of CL7.1 (but as a separate and independent covenant), the Consultant and the Executive hereby covenant and undertake jointly and severally that they shall not within each of the regions, countries, states and territories identified in CL7.1 for a period of: (i) 36 months; or failing that; (ii) 30 months; or failing that; (iii) 24 months; or failing that; (iv) 18 months; or failing that; (v) 12 months; or failing that; (vi) 6 months: from the termination of the Consultancy (however occurring):- (a) canvass, solicit or endeavour to entice away from the Company or any subsidiary any person who or which at any time during the last 12 months of the Consultancy or at the date of termination of the Consultancy were or are clients or customers of the Davco Division (or any subsidiary or other Division of the Company to which consultancy services were provided) or in the habit of dealing with the Davco Division or any such subsidiary or other division of the Company; (b) solicit, interfere with or endeavour to entice away any employee of the Davco Division or of any subsidiary or other Division of the Company to which consultancy services were provided; or (c) counsel, procure or otherwise assist any person to do any of the acts referred to in CL7.2(a) or CL7.2(b)." In December 1989 Mr Vatselias gave the appellant six months notice of resignation. He ceased working for the appellant on 29 June 1990. At about the same time as Mr Vatselias left the appellant, so did the four other individual respondents, Ms Filus, Mr Bretreger, Mr Pearce and Mr Nicolaou. Ms Filus was in the accounting department of the appellant, Mr Bretreger was a sales representative and the other individual respondents were connected with production. Whilst there is dispute as to the nature of the connection of Mr Vatselias with the adhesives manufacturing business that was set up under the name ASA, there is no dispute that the other individual respondents all had an equity interest in that business. Nor is there any dispute that, since its commencement in September 1990, the business of ASA has competed with the appellant's business in relation to the manufacture and sale of adhesives. The primary issue in the case concerns the relationship between Mr Vatselias and that business, and the resolution of that issue turns upon the arrangements that were made between the various respondents in the second half of 1990 and early 1991. 4 UNREPORTED JUDGMENTS In considering those arrangements it is of significance that the appellant commenced these proceedings in December 1990, claiming that what was going on involved, amongst other things, a contravention by Mr Vatselias of the obligations under CL7.1 of the Consultancy Agreement. The arrangements between the respondents: There were two competing versions as to the effect of the arrangements between the respondents in relation to the ownership of the business of ASA. Young J did not accept either of them. The appellant's case was that Mr Vatselias and the other four individual respondents, through companies under or controlled by them, were effectively, between them, the owners of the business of ASA, Mr Vatselias having a 56 percent interest, and the remaining 44 percent interest being held equally by the other four persons. The contention of the respondents was that, although Mr Vatselias, or interests associated with him, advanced two amounts, one of $200,000 and another of $100,000, which constituted the capital used by the business, Mr Vatselias was a mere lender, and had no connection with the business otherwise than as a creditor. An association of that kind, it was argued, did not involve a contravention of CL7.1. Young J agreed that if Mr Vatselias were a mere lender to the business that would not involve a contravention of CL7.1. However, his Honour rejected the contention of the respondents that there never was any association between Mr Vatselias and the business of ASA going beyond that of a creditor and debtor. His Honour found that it had indeed been the intention of the parties that Mr Vatselias would become a 56 percent owner of the business of ASA, and he described the relationship between Mr Vatselias and the others up until February 1991 as that of "co-venturers" in the business. However, his Honour concluded that, probably because of the intervention by the appellant in commencing these proceedings, as from a date in February 1991 Mr Vatselias was a mere creditor. The reasoning which led to that conclusion will be examined in detail below. The arrangements that were set in train in the second half of 1990 involved the setting up of a unit trust. The trustee, Stonenote Pty Ltd, which is the third respondent, carried on the business of ASA. The trust was initially constituted, in October 1990, by the issue of four units, one to each of the other individual respondents, or companies associated with them. The evidence showed that the persons who took the initiative in making the arrangements for the establishment of the trust, and the business of ASA, were Mr Vatselias and Ms Filus. Young J found that they were both conscious of the problems that might arise by reason of CL7.1 of the Consultancy Agreement, and took pains to minimise those problems. As will appear below his Honour seems to have made conflicting findings in relation to the awareness of CL7.1, and the possible problems it might bring, on the part of Messrs Bretreger, Pearce and Nicolaou. It is unnecessary to go into the full detail of the events surrounding the commencement of the business of ASA, the establishment of the unit trust, and the making of advances by interests associated with Mr Vatselias for the purpose of providing capital for the ASA business. It is important to note, however, that 'Young J concluded that Mr Vatselias, Ms Filus and their advisers took steps to disguise the true intention of the parties, and to create the impression that Mr Vatselias was merely a lender. In fact Mr Vatselias moved into the premises that were also partly occupied by ASA and Young J found that this was done so that he would be "available" to ASA. URJ LAPORTE GROUP AUSTRALIA LTD v VATSELIAS (Gleeson CJ) 5 Young J found that it was the common intention of all the parties that Mr Vatselias, or his companies, would be issued with fifty-six units in the unit trust. However, before this could be done, the appellant, in December 1990, commenced the present proceedings. Thereafter, in February 1990, Mr Vatselias moved out of the ASA premises, and further steps were taken to document the relevant contractual arrangements in such a way as to support the conclusion that he was merely a provider of loan capital to the ASA business. The findings of Young J: His Honour, in leading up to his findings on the matter of the association between Mr Vatselias (and Mank) and the other respondents in relation to the business of ASA referred to a number of matters which he regarded as of particular importance. First, his Honour referred to a diary note made in mid-October 1990 by a bank manager who spoke with Mr Vatselias and Ms Filus about the then current proposals. His Honour found that the note was a record of what Mr Vatselias told the manager. The note recorded that ASA had recently been created by Mr Vatselias and was operating from rented premises at 10 Turbo Road Marayong. It said that Mr Vatselias had recruited four key people from Davco and had "given them" each eleven percent of ASA. It also recorded certain projections made by Mr Vatselias as to the future of the ASA business. Secondly, his Honour referred to the involvement of Mr Vatselias in discussions with the accountant who set up the various contractual arrangements, and the unit trust. Not only was Mr Vatselias closely involved in those discussions, but his Honour found that in a number of documents Mr Vatselias had been originally identified as the client of the accountant, and steps were later taken to alter the documents to remove that impression. Thirdly, his Honour referred to a matter mentioned above, that is to say, that shortly after ASA started its business at 10 Turbo Road Marayong Mr Vatselias moved his own operations into part of the same premises. Finally, his Honour dealt with the unit trust, and observed that draft documents had been prepared which provided for the issue of fifty-six units to be held in trust for Mr Vatselias, and for an additional ten units to be issued to interests associated with the other four individual respondents who had already been allotted one unit when the trust was originally constituted. His Honour rejected an attempted explanation to the effect that all that was intended was that the fifty-six units should be issued by way of security for advances to be made by Mr Vatselias. Having referred to those matters, and having rejected the evidence of the individual respondents in relation to a number of matters, his Honour expressed his conclusions as follows: "Accordingly, putting all these matters together, in my view Mr Vatselias was more than a mere lender of money. The most likely explanation is that Vatselias, Pearce, Nicolaou, Bretreger and Filus were all co-venturers in the ASA business. This explanation is compatible with the undoubted fact that Mr Smith and others who put the transaction together on behalf of the five of them knew they had to tread very carefully because of the covenant. The co-venturers also were well aware of this. When all the charades are played out, the backdated and altered documents rectified and the lies expunged, the conclusion must be that Mr Vatselias was a person who was at least associated with the ASA business in his involvement as a lender and in his involvement with Bronwyn Filus in organising the structure of the business and probably also in being available in the Turbo Road factory. 6 UNREPORTED JUDGMENTS I do not think, however, that I can go quite so far as to say, as the plaintiff asks me to do, that I should infer that Mr Vatselias is in fact an equity holder in ASA. I think that the institution of these proceedings may well have stopped further steps being taken to bring this about. It is quite clear that Mr Vatselias ceased to use the Turbo Road premises by February 1991. As the a allocation of the fifty-six units was never made, the only relationship that has existed since February 1991 has been one of lender and borrower. Such a relationship in itself is not sufficient to constitute d person as interested in or even associated with another business. Accordingly, in my view, it can only be said that between August 1990 and February 1991 the first and second defendants breached their covenant. I have deliberately left vague both the terminus a quo and the terminus ad quem because these reasons are already overlong and in the circumstances I do not think anything depends on determination with precision between what days there was a breach." Before turning to the challenge which is made to those findings, it is necessary to note some of their important features. His Honour found that, at least originally, Mr Vatselias and the other four were "all co-venturers in the ASA business". He said that the accountant, Mr Smith, "put the transaction together on behalf of the five of them". The "transaction" to which his Honour was referring must have comprehended the constitution of the ASA unit trust, the proposed allotment of units, and the operation of the business of ASA. However, his Honour held that he could not go "quite so far" as to hold that Mr Vatselias in fact became an equity holder in ASA. He thought the institution of the proceedings may have stopped further steps being taken to bring that about. This finding requires close examination. It was submitted on behalf of the respondents that his Honour noted, accurately, that the parties never actually issued the fifty-six units to Mr Vatselias, although the reason why this happened was probably the institution of the present proceedings. However, if his Honour found, as he evidently did, that it was originally the common intention of all five individuals that Mr Vatselias should have a fifty-six percent equity interest in the business of ASA (a finding which needs to be related to the fact that he had been the "key man" in the original business, that he had both technical and entrepreneurial expertise and wide business contacts, and that he was the sole source of finance for the ASA business when it was set up) what happened to that intention? Was it changed to an intention that Mr Vatselias should never have an equity interest in the business? Or was it changed to an intention that he should have an equity interest, but only as from the expiration of the period of three years the subject of the covenant? If the latter, was he to become entitled to take up that equity interest without any further consideration, and in that respect would he get the benefit of any increase in the value of the assets in the business in the meantime? His Honour made no comment on any such question. It is also to be noted that the final portion of the reasoning quoted above appears to proceed from an assumption that, unless and until fifty-six units were allotted to Mr Vatselias, the business was legally owned by the other four persons. It is true that each of those persons, or companies associated with them, owned one of the only four units in the trust that were issued, but those units were issued for the purpose of constituting the trust, and as part of a wider agreement between the parties. URJ LAPORTE GROUP AUSTRALIA LTD v VATSELIAS (Gleeson CJ) 7 The appellant argues that the account that Mr Vatselias gave the bank manager is probably a better indication of the reality of the transaction, which was that Mr Vatselias, the provider of the whole of the necessary capital, was the person who had created ASA and that he had recruited four key people from Davco and "given them" each eleven percent of ASA. It would be, the appellant argues, to stand the transaction on its head to treat ASA as having been established by the other four persons, and to conclude that events interrupted an intention on their part to give Mr Vatselias a fifty-six percent interest in ASA. Finally, the appellant observes that this was found to be a case in which the respondents had deliberately set out to create documents and agreements that misrepresented the true nature of their transaction, and to disguise their real intentions. In those circumstances it would be inappropriate to work out their relations between one another upon a basis that takes what happened in relation to the allotment of units at face value. Conclusion on challenge to findings: I consider that there is a good deal of force in the submissions made on behalf of the appellant. Once one accepts, as his Honour did, that it was the original intention of the individual respondents that Mr Vatselias would have a fifty-six percent equity interest in the business of ASA, and that the respondents were not telling the truth when they said it was only ever intended that he should be a mere lender to the business, then one would require clear and cogent evidence to conclude that there was such a radical change of intention as that attributed to the respondents by his Honour. The fact that Mr Vatselias was originally intended, not merely to have an equity interest in the business, but to have the majority interest, a fact which is entirely consistent with the whole history of his relationship with the earlier business, and with the other individuals involved, shows how important he was in the scheme of things. He was not only the man who was putting up the whole of the capital, he was the person who had the principal experience and expertise that was necessary for the success of the business. He had important business contacts. In the old business, he had in effect been the founder and one of the principal employers, and the other four were merely employees. No doubt the new business would involve a significant element of entrepreneurial risk; a risk of a kind that Mr Vatselias was accustomed to bear, but hardly likely to be one which the other individuals would face up to on their own. He was the experienced business man. It seems to be true that, so far as appears from his reasons for judgment, his Honour, having held that there was an important change of intention, did not decide what the nature of that change was. He may have thought it did not matter, because at the expiration of three years there was nothing to stop Mr Vatselias from having an equity interest in the business of ASA. However, such a change of intention as that found by his Honour would require some careful working out, and there are a number of alternative possibilities as to what might have been involved in it. The respondents, of course, did not give evidence that there was any relevant change of intention. They simply denied that there was ever any plan that Mr Vatselias would hold an equity interest in the business of ASA, and in that respect they were not accepted. As I have remarked, on the findings made by Young J the change of intention that was involved in February 1991 was no small matter. It was a change of intention as to who was to have a majority interest in, and control of, the 8 UNREPORTED JUDGMENTS business. There being no evidence from the respondents that they intended any change at all, I would not be prepared to infer that any such change occurred. His Honour attached significance to the move by Mr Vatselias in February 1991 out of the premises at Turbo Street Marayong. This, however, is explicable by reason of the commencement of the litigation, and the fact that his continued presence there would have been an embarrassment in the conduct of the case. The failure to proceed (at least for the time being) with the allotment of the fifty-six units in the unit trust can be accounted for in the same way. In my view his Honour was correct to find that there was originally an agreement between all the respondents that Mr Vatselias would have a fifty-six percent interest in the business of ASA, but with respect I consider that his Honour was in error in concluding that there was a change in that agreement. His Honour should have held that the original agreement remained on foot, and on that basis there was a contravention of CL7.1 which was continuing as at the date of judgment. It is not in dispute that if the facts were as I consider they should have been found to be, the first and second respondents had a continuing "{nterest" in a competitive business within the meaning of CL7.1. I will deal later with the question of the appropriate relief. The alleged breach of CL7.2 At first instance the appellant argued that by soliciting and enticing the other individual respondents away from Laporte the first respondent was in breach of the provisions of CL7.2 of the Consultancy Agreement. Young J held that the evidence fell short of establishing solicitation or enticement, and there has been no appeal against this aspect of his Honour's decision. Accordingly, it is unnecessary to deal further with the matter. Interference with contractual relationships: The appellant contended that the third to ninth respondents committed the tort of interfering with the contractual relationships between the appellant and Mr Vatselias, by participating in a scheme to permit him to be associated with a business which competed with the business of Laporte, or that they intentionally induced or procured Mr Vatselias to breach CL7.1 of the Consultancy Agreement. The second alternative was rejected on the factual ground that there was no evidence of inducement of Mr Vatselias to do what he did. Young J dealt with the matter on the basis that the primary contention was that the respondents in question interfered with the contractual relationships between Laporte and Mr Vatselias. As was pointed out in British Motor Trade Association v Salvadori [1949] 1 Ch 556 at 565, although the word "inducement" or "procuring" is often used in relation to this tort, the relevant concept is the wider one of interference, which was described in that case as referring to "any active step taken by a defendant having knowledge of the covenant by which he facilitates a breach of that covenant". It was common ground that the constituent elements of the tort in question were as described by Slade J in Greig v Insole (1978) 1 WLR 302 at 332. His Lordship said: "At common law, it constitutes a tort for a third person deliberately to interfere in the execution of a valid contract which has been concluded between two or more other parties, if five conditions are fulfilled. First, there must be either (a) 'direct' interference or (b) 'indirect' interference coupled with the use of unlawful means.... Secondly, the defendant must be shown to have had knowledge of the relevant contract. Thirdly, he must be shown to have had the intent to interfere with it. Fourthly, in bringing an action, other than a quia timet action, the plaintiff URJ LAPORTE GROUP AUSTRALIA LTD v VATSELIAS (Gleeson CJ) 9 must show that he has suffered special damage, that is more than nominal damage. In any quia timet action the plaintiff must show the likelihood of damage to him resulting if the act of interference is successful... Fifthly, so far as is necessary, the plaintiff must successfully rebut any defence based on justification which the defendant may put forward." The fifth issue did not arise in the present case. Young J resolved the matter in favour of the respondents on the basis of the second and third issues. In considering his Honour's findings, and the attack that is made upon them, it is necessary to deal separately with the case against Messrs Bretreger, Pearce, and Nicolaou (and their respective companies) on the one hand, and the case against Ms Filus, and her company, on the other hand. There was a contest at the trial as to whether, at least prior to the commencement of the present proceedings, Messrs Bretreger, Pearce and Nicolaou were aware of the existence of a covenant restraining Mr Vatselias from competing with Laporte. Each asserted that he was not aware of any such restraint until the present proceedings were commenced. However, that evidence was contradicted by other witnesses who gave evidence of conversations with those three respondents which, if accepted, would have shown that they were aware of the restraint. On this issue, the reasons of Young J appear to contain an internal inconsistency. At one portion of his judgment his Honour said: "The plaintiff invites me to find that Pearce, Bretreger and Nicolaou must have known about the covenant between July 1990 and February 1991. The plaintiff said it was incredible that people would go into this business venture without having discussed their plans with Vatselias and making sure that they could get the necessary finance. However, although I think there are a lot of suspicious circumstances, I do not consider that I should infer that the fourth, fifth and sixth defendants did know about the restraint." However, seven pages earlier in his judgment, in a passage that has been quoted above, his Honour had said: "The most likely explanation is that Vatselias, Pearce, Nicolaou, Bretreger and Filus were all co-venturers in the ASA business. This explanation is compatible with the undoubted fact that Mr Smith and others who put the transaction together on behalf of the five of them knew they had to tread very carefully because of the covenant. The co-venturers also were well aware of this." In that context, the reference to "the co-venturers" can only have been a reference to the persons earlier named, who included Messrs Pearce, Nicolaou and Bretreger. The matter of which they were well aware included "the covenant", and the need, by reason of the covenant "to tread very carefully". I find it impossible to reconcile the above findings. That leaves this Court in a difficult position. We are confronted with an issue of fact that depends upon the credibility of witnesses none of whom have been seen by this Court, and we are to determine an issue of fact in respect of which the trial judge made conflicting findings. Messrs Bretreger, Pearce and Nicolaou handed in their resignations to Laporte in August 1990. The witnesses White and Frampton gave evidence of conversations with them at about that time in which reference was made to "Andy's restraint" and to the fact that they would not be able to go into business with him in competition with Laporte. For example, Mr White said that in August 1990 Pearce and Nicolaou came into his office with a letter of resignation. He said to them: 10 UNREPORTED JUDGMENTS "What are you going to do". They said: "We have been told not to say". He said: "Are you going into opposition with us?" They said: "We have been told not to say." He said: "You are not going with Andy are you?" They said: "We have been told not to say." He said: "Are you going to make adhesives?" They said: "We have been told not to say". Mr White also gave evidence that on a number of occasions in discussions with Mr Smith he said words to the following effect: "Whatever it is you are doing it had better not be with Andy. You know he has a restraint agreement." Young J made no reference to this evidence in his reasons. Although there was evidence of witnesses at the trial which tended both ways, in my view the objective probabilities are strongly in favour of the versions contended for by Mr White and Mr Frampton. This conclusion is reinforced by what I have already held was the finding that should have been made in respect of the first issue considered above. The persistent efforts, remarked upon by Young J, to conceal the true position concerning the interest of Mr Vatselias in the new business, although they were not necessarily all known to Messrs Bretreger, Pearce and Nicolaou, constitute a background which gives support to the version of events deposed to by Messrs White and Frampton. Ms Filus admitted that she was at all material times aware of the restraining covenant. However, Young J found in her favour on this cause of action on the basis that she had no intention that there should be a breach of the covenant. His Honour's finding in that regard was as follows: I do not consider I can draw an inference which would enable me to make (a finding of intent to procure a breach). Pearce, Bretreger and Nicolaou left the matter to Filus. Filus took particular care to take advice and as a result of taking advice, believed that the advancement of the loan funds would not be in breach of the restraint. In my view I cannot find that there was an intention to interfere with the contract." The appellant has made a strong attack on this finding. The appellant submits that, when one looks at the actual evidence relating to what Ms Filus did in the matter, it demonstrates that she took particular care not to take advice. The only advice in question which she says she took was that which arose out of a conversation between her and Mr Smith. The evidence of Smith, however, was that when Ms Filus raised the matter with him he said that he was not competent to give legal advice about the effect of the Consultancy Agreement. There is a further difficulty about his Honour's finding It was to the effect that Ms Filus believed that the advancement of the loan funds would not be in breach of the restraint. However, I have already held that there was a great deal more to the proposed arrangement with Mr Vatselias than the advancement of loan funds. Ms Filus was one of the persons most deeply involved in the steps which his Honour found were taken to disguise the true nature of the arrangements contemplated with Mr Vatselias. In those circumstances I would have no hesitation in attributing to her knowledge that the arrangements constituted a breach of the covenant contained in the Consultancy Agreement. Those arrangements, as I have found them to be, were an obvious breach. Accordingly, I am of the view that the basis upon which his Honour found in favour of the fourth, fifth, sixth and eighth respondents was in error, and that the appellants' claim in tort against those respondents should have succeeded. Misuse of confidential information: URJ LAPORTE GROUP AUSTRALIA LTD v VATSELIAS (Gleeson CJ) 11 ASA manufactures a number of adhesive products. However, the appellant claims that two of those products, Asaflex and Dampfix, were manufactured in a way that involved misuse of confidential information, the two products being very similar to the appellant's Davcoflex and Dampflex. Mr Pearce in his evidence admitted, in effect, that when he formulated Asaflex and Dampfix he had in his memory the appellant's formula for Davcoflex and Dampflex and made use of that information. The case provides a nice illustration of the difficulty in distinguishing between confidential information that will be regarded as a trade secret, or the equivalent of a trade secret, and mere technical know how which an employee is entitled to take with him and use when he leaves his employment (cf Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317). Adhesive products are manufactured from raw materials which are provided by suppliers such as BASF Australia Ltd. In order to encourage the use of their products, raw material suppliers provide adhesives manufacturers with what are known as starting point formulations. These were described in evidence as being like a recipe of all the ingredients necessary to manufacture an adhesive. Any new entrant into the market could obtain, from a raw materials supplier, the recipe for manufacturing adhesives. On the other hand, the evidence also showed that manufacturers make certain variations to the recipes in order to produce a product which they hope the trade will recognise as superior. The formulations for Davcoflex and Dampflex were based upon recipes provided by a raw materials supplier, but involved certain variations or modifications. When Mr Pearce left the employment of Laporte he took with him, in his head, his knowledge of those variations, and he used that information as the starting point for his formulation of Asaflex and Dampfix. Was he, in so doing, making improper use of trade secrets that belonged to Laporte, or was he simply using technical expertise and know how which it would have been wrong for him to disclose to Laporte's competitors so long as he was in its employ, but which he was entitled to take with him and use to his advantage when he left that employment? Young J held that the formulations for Davcoflex and Dampflex constituted trade secrets, and that there had been a misuse of confidential information by Mr Pearce and the other respondents. Against that finding the respondents have cross-appealed. However, when it came to the question of granting relief his Honour indicated that he regarded the matter as of relatively minor practical significance. First, his Honour declined to grant an injunction. He said: "The evidence as to starting point formulations means that it would be quite feasible for the relevant defendants to go into the market place, buy and adapt a starting point formula and compete just as effectively with the plaintiff as they can with the existing product." When it came to the matter of damages, his Honour indicated a disposition to think that the appellant would merely be entitled to nominal damages, but that was a subject that he left for the determination of the Master in the course of an inquiry as to damages. The logical starting point for consideration of this problem is the cross-appeal. In the course of the judgment in Faccenda Chicken Ltd v Fowler [1987] 1 Ch 117 the English Court of Appeal at 138 referred to "secret processes of manufacture" as obvious examples of trade secrets or their equivalent. From one point of view the question in the present case is whether the variation to the 12 UNREPORTED JUDGMENTS starting point formulations provided by suppliers of raw materials can be described, in this context, as "secret processes of manufacture". It is, of course, information which the appellant would wish to keep from its competitors, and a significant degree of expertise, experience, and technical know how would have gone into the decision as to the appropriate variations to be made to the starting point formulations. On the other hand, there seems to be no attempt made by the appellant to impose any restraint upon Mr Pearce or the other respondents (except Mr Vatselias) as to competing after the termination of their employment with the appellant. There was no evidence of any particular steps or precautions taken by the appellant to keep its formulations secret. The finding of Young J, when making a decision as to the matter of relief, to the effect that people with the skill of Mr Pearce, even if they had not known the appellant's formulations, by making use of starting point formulations could very easily have arrived at a product as good as the appellant's product, tends against the conclusion that what are here involved can be described as trade secrets or their equivalent. At no stage did the appellant seek to identify precisely what it was about its formulations for Davcoflex or Dampflex that constituted secret information (cf O'Brien v Komesaroff (1982) 150 CLR 310 at 326-328). Its contention is simply that its formulations vary to some extent the starting point formulations provided by the raw materials supplier, and its formulations are trade secrets. In my view the appellant did not make out its case that there was here a misuse of confidential information. The cross-appeal should be allowed. Relief: The appeal and cross-appeal should be allowed, and the orders made by Young J should be set aside. The following orders should be made: 1 An order that the first respondent be restrained until 29 June 1993 from executing, giving effect to or accepting any right, entitlement or benefit pursuant to any agreement with any of the third to eighth respondents whereby the said parties have agreed that the first respondent: (a) has or shall have any interest in the assets and undertaking of the ASA business, or (b) has or shall have any beneficial interest in any units of the ASA unit trust. 2 An order that the first respondent be until 29 June 1993 restrained from: (a) providing to the third respondent, whether directly or indirectly, or to any other person monies to be used by or to be available for use by the third respondent or any other person in or in connection with the conduct of the ASA business, or (b) exercising any vote or other power as shareholder or director of the ninth respondent or of any other company in such a way as to cause the ninth respondent or any other company to provide to the third respondent, whether directly or indirectly, or to any other person any monies to be used by or to be available for use by the third respondent or any other person in or in connection with the conduct of the ASA business. 3 An order that the first respondent and the second respondent (by itself, its officers, servants or agents) be until 29 June 1993 restrained from: (a) by any means whatsoever directly or indirectly assisting the third respondent or any other person in the conduct of the ASA business, and (b) directly or indirectly participating in or being concerned in the conduct of the ASA business. URJ LAPORTE GROUP AUSTRALIA LTD v VATSELIAS (Meagher JA) 13 4 An order that the matter be referred to a Master to inquire as to the amount of damages suffered by the appellant as a result of the breaches of the first and second respondents of CL7.1 of the Consultancy Agreement on the basis that the first respondent has breached CL7.1 by virtue of having or being entitled to an interest in the ASA business or ASA unit trust as an owner thereof. 5 An order that the matter be referred to a Master to inquire as to the amount of damage suffered by the appellant as a result of interference by the third, fourth, fifth, sixth and eighth respondents with the contractual relations between the appellant and the first and second respondents pursuant to the Consultancy Agreement upon the basis of the breaches found by this Court. 6 An order that the third to eighth respondents be restrained until 29 June 1993 from giving effect to any agreement with the first respondent whereby the first respondent may be entitled to any interest in the assets and undertaking of the ASA business or whereby the first respondent may have any beneficial interest in any units of the ASA unit trust. 7 An order that the respondents pay to the appellants such damages as the Master may find to have been sustained. Costs: It was agreed between the parties that this Court should not make any decision at this stage on the matter of costs. There are two complicating factors. First, there may still be a substantial contest as to the quantum of damages appropriate to be found by the Master. Secondly, we were told that there was an offer of compromise made, although we do not know its terms. In relation to the costs of the appeal, the parties may restore this matter to the list for further argument on that subject in the event that they are unable to reach agreement. In relation to the costs to the proceedings at first instance, the matter should be remitted to the Equity Division for that issue to be determined following the outcome of the inquiry of the inquiry before the Master, and in the light of the judgment of this Court. Clarke JA I agree with the reasons and orders of the Chief Justice. Meagher JA I agree with the Chief Justice. ORDERS 1 Appeal and cross-appeal allowed. 2 Orders of Young J set aside. 3 New orders made in accordance with the detail shown in the judgment of Gleeson CJ. 4 Parties to have liberty to restore the matter to the list for further argument on the subject of the costs of the appeal should they be unable to reach agreement on that matter. 5 Matter remitted to Equity Division for determination of the costs at first instance following the outcome of the Master's inquiry as to damages. Counsel: APPELLANT: T M Jucovic QC / D J Fagan (1) RESPONDENT: K Lindgren QC / I Harrison (2) RESPONDENT: F M Douglas QC / G McNally 14 UNREPORTED JUDGMENTS Solicitors: APPELLANT: Freehill Hollingdale and Page (1) RESPONDENT: Harris and Co (2) RESPONDENT: Hunt and Hunt