Morris v Corbett [2003] NSWSC 1121

New South Wales Supreme Court

CITATION : Morris v Corbett [2003] NSWSC 1121 HEARING DATE(S) : 11-14 March, 7 April 2003 JUDGMENT DATE : 1 December 2003 JURISDICTION: Equity JUDGMENT OF : Austin J DECISION : Proceeding dismissed

CATCHWORDS : CONTRACT - construction - restraint of trade clause - whether, properly construed, clause contained two separate exceptions to prohibition, or one composite exception LEGISLATION CITED : Restraint of Trade Act 1976 (NSW), s 4 CASES CITED : Australian Broadcasting Commission v Australian Performing Rights Association Ltd (1973) 129 CLR 99 Morgan Equipment Co v UMW Corporation Sdn Bhd [2002] NSWCA 193 Barry Morris (P1) PARTIES : Barry M Morris Holdings Pty Ltd (P2) Pinside Pty Ltd (P3) Paul Corbett (D) FILE NUMBER(S) : SC 3454/96 COUNSEL : M Galvin (Ps) T Alexis (D) SOLICITORS : Creagh & Creagh (Ps) Matthews Folbigg (D)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

AUSTIN J

MONDAY 1 DECEMBER 2003

3454/96 BARRY MORRIS & ORS V PAUL CORBETT JUDGMENT 1 HIS HONOUR: The first plaintiff, Mr Morris, is a quantity surveyor by training, and the other two plaintiffs (Barry M Morris Holdings Pty Ltd and Pinside Pty Ltd) are companies controlled by him. The defendant, Mr Corbett, is an architect by profession. They formed and developed various businesses together over the period from 1978 to 1990, including building construction and fit-out services. The fit-out business was successful and established contacts with large companies and institutions for office and branch fit-outs. Mr Morris was principally involved in the construction of larger projects, and Mr Corbett was engaged in the marketing estimating area of the fit-out business. 2 In 1990 they negotiated arrangements under which Mr Corbett would sell to Mr Morris his shares in various business entities through which the businesses were conducted, and to give effect to their arrangements they entered into two agreements on 24 September 1990, referred to in the pleadings and at the hearing as the Deed and the Written Agreement. 3 Subsequently serious disputes arose between them, and the principal operating company, Renbay Systems Pty Ltd, failed. Mr Morris alleges that Mr Corbett breached provisions of the Deed and the Written Agreement by failing to perform his obligations and by diverting business from the plaintiffs to companies under his control. He says that Mr Corbett's breaches of contract sounded the death knell for Renbay Systems. 4 By a statement of claim filed on 23 September 1998 he and his companies alleged that, by virtue of specified breaches, each of them lost contracts with eight named entities including St George Building Society Limited and the Health Insurance Commission. They claimed damages and interest, and also an account of profits and a constructive trust for the profit derived from contracts with the precluded companies referred to in clause 15 of the Deed. Mr Corbett denied the allegations of breach. 5 At the hearing counsel for the plaintiffs informed the Court that his clients did not press their claims for an account of profits or relief by way of constructive trust, seeking only damages for breach of clause 15 of the Deed. He said that the plaintiffs' claims for lost contracts would be confined to contracts with St George Building Society Ltd and the Health Insurance Commission. The trial proceeded on that basis. The business relationship between Mr Morris and Mr Corbett 6 Mr Morris met Mr Corbett in 1977, when they were both working for Leighton Contractors. Mr Morris was employed as a project manager/quantity surveyor and Mr Corbett was employed as an architect/design coordinator. In 1978 they were both persuaded to leave Leighton Contractors to work for another firm. After about six months, they both decided to leave their new employer. They formed two companies, Corbett Morris & Associates Pty Ltd and Rowecon Building Services Pty Ltd, and commenced business, first in Eastwood and then at Girraween. At Girraween they obtained a lease of factory premises as well as offices, so that they could operate a joinery shop. 7 Corbett Morris & Associates was incorporated in May 1980. It was a building company, which was intended to obtain design and construction work but would also carry out work for clients who already had drawings prepared. It was successful at first but according to Mr Corbett, it ran into difficulties in early 1985 due to contracts for works associated with the health club industry. It entered into a scheme of arrangement with its creditors in July 1985. 8 Rowecon Building Services was incorporated in May 1981, and was formed to carry out joinery and shopfitting activities. After the demise of Corbett Morris & Associates it became the main company carrying out all of the contracting operations. 9 The business grew and Mr Corbett and Mr Morris decided to purchase industrial land and build a factory at Wetherill Park. The property was acquired in the name of another company, which does not otherwise figure in this proceeding. The property was sold later, subject to a lease-back arrangement. The proceeds of sale were used to buy a block of land at Greystanes, in the name of Pinside, a company owned by the wives of Mr Morris and Mr Corbett. It was intended, at first, that a factory would be built on the Greystanes land, but some development delays were experienced and eventually Mr Corbett decided against the development, although Mr Morris continued to support it. 10 Renbay Systems was incorporated in July 1982. It was formed to carry on business as a distributor of Dexion storage products. An extension was built to the rear of the factory at Wetherill Park to accommodate Renbay's operations in assembling office storage products for AHI-Precision. After AHI-Precision decided to assemble its own products, a substantial portion of the factory was empty. 11 At about the same time Rowecon Building Services was in financial difficulty, after it made a substantial loss on a large contract at Australia's Wonderland. Mr Morris and Mr Corbett decided to wind up the company. Thereafter they used Renbay as the vehicle for their main construction operation. 12 They developed their shopfitting and joinery business, working for major clients including St George Building Society. Over time, Mr Morris became principally involved in running the larger building projects, while Mr Corbett was more involved with shopfitting and joinery work. Consequently Mr Morris did not have much face-to-face contact with shopfitting clients such as St George Building Society and the Health Insurance Commission. Mr Corbett had contact with these clients as the manager of the shopfitting business, although the principal point of contact for the Health Insurance Commission at Renbay was Mr Alan Pearson, and Mr Paul Axiak carried out a lot of the St George fit-out work and had close relationships with several St George personnel. 13 In 1988/1990 St George Building Society became Renbay's principal client. At that time St George had an abnormally high demand for fit-out services. It had taken over the State Building Society in 1988. The State Building Society had approximately 60 branches in New South Wales. It was necessary to change the colour schemes and signage of the branches that St George would retain, and while some branches were closed, in other cases the St George branch was transported to the State Building Society location. The evidence given by Mr Corbett and by Mr Darrell Byrnes of St George Building Society was that the additional building and joinery work requirements created by the merger would last no more than 18 months to two years. Negotiations for Mr Corbett's withdrawal 14 According to Mr Morris, one day in July 1990 Mr Corbett said to him: "I want to take things easy. My main reason for this decision is as you are aware my daughter has contracted leukaemia. I am keen to do some architectural type projects working from home and some property management for Norman Ross as well as spending some time building a townhouse development on some land owned by my family." 15 Mr Morris' evidence is that he was also keen to downsize as he had a young family. According to Mr Morris, Mr Corbett said shortly afterwards: "I want to leave the company and to be 'bought out' as I want money to allow me to do my own developments. I do not want to do shopfitting nor have a joinery shop or employ people." 16 Mr Corbett gave a different account of his motivations for deciding to end his business relationship with Mr Morris. He said that he was expecting a downturn in business once the works associated with St George's integration of State Building Society came to an end. He did not want to go into debt to build a factory on the Greystanes land, but Mr Morris wished to do so. He denied that he said the words attributed to him by Mr Morris. He said that during the negotiations, various options were canvassed as alternatives to Mr Morris buying him out. He said he would have been happy with any of the alternative options but was not prepared to buy out Mr Morris. 17 I prefer the evidence of Mr Corbett to the evidence of Mr Morris on this point. Mr Morris said that Mr Corbett explained his decision by reference to his daughter's leukaemia, and yet (according to Mr Corbett's evidence) his daughter was diagnosed with leukaemia in October 1984, the treatment ended in 1986 and she had been healthy since that time. 18 According to Mr Morris, he had in mind during the negotiations that Mr Corbett had contacts and customer relationships with many of Renbay's large clients including the St George Building Society and the Health Insurance Commission. By reason of the agreements they negotiated, under which Mr Corbett would sell his interest and eventually retire from the business, and Mr Morris would come to run shopfitting projects, Mr Morris regarded it as important to have Mr Corbett assist and liaise with clients, and to introduce Mr Morris to them. Mr Morris was concerned to achieve a smooth transition, with no disruption of staff of the client base. Hence, he said, provision was made for Mr Corbett to remain with the firm for time, and for staged disclosure of the arrangements to staff. 19 Mr Corbett gave a somewhat different account of the negotiations. He said he clearly remembered saying to Mr Morris: "I might take a full-time job working for another organisation so I cannot promise to be available during business hours." 20 They entered into negotiations on 21 August 1990, that culminated in the Deed and Agreement dated 24 September 1990. It seems to me more likely than not that Mr Morris approached the negotiations with the objectives in mind that I have described, and that Mr Corbett was concerned to be free to take a full-time job as an employee. The agreements 21 The Deed recorded an agreement between Mr Morris and Mr Corbett and their respective companies, and Mrs Corbett, for Mr Corbett to retire from his business interests with Mr Morris. At the time of the Deed, there were five companies in the various states that I have described, namely Corbett Morris & Associates, Rowecon Developments, Stortec Systems Pty Ltd, Stortec Pty Ltd and Renbay Systems. Mrs Corbett was to retire from her role in the companies. 22 The Deed was made on 24 September 1990 between Valpar Pty Ltd, Mr and Mrs Corbett, Barry M Morris Holdings, Pinside and Mr Morris. Valpar was a company controlled by the Corbett interests. Barry M Morris Holdings was a company controlled by the Morris interests. who owned the shares in Pinside except for one share owned by Valpar. Mr Morris obtained legal assistance for preparation of the document, although the drafting is far from perfect. 23 By the Deed Mr Corbett agreed to sell to Mr Morris his shares in Corbett Morris & Associates for the sum of $255,000, and his shares in Rowecon Developments for nominal consideration, and Valpar agreed to sell to Barry M Morris Holdings its shares in Stortec Systems, Stortec, Renbay Systems and Pinside, in each case for nominal consideration. Mr Corbett agreed to lend Pinside $45,000 and Pinside agreed repay Mrs Corbett that amount, for which Pinside was indebted to her. There were consequential provisions including provisions for Mr and Mrs Corbett to resign as directors of various companies. 24 By clause 8 of the Deed, Renbay Systems agreed that it would continue to engage Valpar as a consultant until 31 December 1990 for a consultancy fee and payment of motor vehicle running expenses and telephone accounts. By clause 9 Renbay Systems agreed that it would continue to employ Mr and Mrs Corbett until 31 December 1990 at stated salaries. 25 Clause 15 of the Deed is central to the dispute between the parties. It is in the following terms: "15. Mr Corbett shall not for a period of 5 years from the date of this agreement either directly or indirectly, whether solely or jointly with or as director, manager, agent or servant of any person or corporation carrying on [sic] or be engaged or interested in any business which does any business with any of the following corporations which business is of a nature similar to that conducted by any of the [sic] Renbay Systems Pty Ltd, Stortec Systems Pty Ltd, Stortec Pty Ltd, Pinside Pty Ltd, Rowecon Developments Pty Ltd and Corbett Morris & Associates Pty Ltd or any significant component of those businesses:- St George Building Society Limited National Australia Bank ANZ Banking Group Health Insurance Commission Illawarra Credit Union BMW Delany Hall Nursing Home Gavagna Bros - Glebe Project only Simons Carpets McDonalds Testoni Burbery Nothing in this clause shall prevent Mr Corbett from providing his professional services as an architect to any of the corporations listed above or any corporation providing services to those corporations and nothing in this clause shall prevent Mr Corbett from working as an employee on wages for any person firm or corporation whatsoever. Mr Corbett acknowledges that the period of five years is no greater than reasonably required to protect the goodwill of Corbett Morris & Associates Pty Ltd and interests of the other companies shares in which are sold pursuant to this agreement." 26 For convenience, I shall refer to the 12 corporations identified in the clause as "the Specified Corporations". The Deed related to the sale of shares by Mr Corbett and Valpar in Corbett Morris & Associates, Renbay Systems, Stortec Systems, Stortec, Pinside and Rowecon Developments. I shall refer to those six companies as "the Morris/Corbett companies". 27 The proper approach to the construction of a contract of this kind was explained by the High Court in Australian Broadcasting Commission v Australian Performing Rights Association Ltd (1973) 129 CLR 99. In that case Barwick CJ said (at 105-6) that "it is no part of the function of a court by some process of divination as distinct from construction of the language employed to attribute to parties an intention to do something for which their express words do not provide", and he observed (at 107) that "the respondent's submission would require a radical change to be made in the language chosen by the parties to express their intention". 28 In a passage recently applied in the Court of Appeal of New South Wales (Morgan Equipment Co v UMW Corporation Sdn Bhd [2002] NSWCA 193 (27 June 2002), at [21] per Powell JA), Gibbs J said (at 109 to 110): "It is trite law that the primary duty of the court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend the contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, 'even though the construction adopted is not the most obvious, or the most grammatically accurate', to use the words from earlier authority cited in Locke v Dunlop ((1888) 39 Ch D 387 at p 393) which, although spoken in relation to a will, are applicable to the construction of written instruments generally; see also Bottomley's case ((1880) 16 Ch D 681, at p 686). Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid inconsistency between that provision and the rest of the instrument. Finally, the statement of Lord Wright in Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503, at 514, that the court should construe commercial contracts 'fairly and broadly, without being too astute or subtle in finding defects', should not, in my opinion, be understood as limited to documents drawn by businessman for themselves and without legal assistance ( Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1967) 118 CLR 429 at 437) [per Barwick CJ])." 29 The following points should be made about this clause, as a matter of construction of its plain words and in light of the principles stated by the High Court: (1) The first sentence of the clause, down to and including the list of the Specified Corporations, prohibits certain conduct, but the second sentence (beginning "Nothing in this clause …") takes certain identified conduct out of the prohibition. In other words, if conduct falls within the description in the second sentence, it is not prohibited, regardless of whether it falls within the description in the first sentence. (2) The conduct prohibited by the first sentence is conduct of Mr Corbett, not conduct of any other person or entity, whether or not controlled by Mr Corbett. (3) Mr Corbett is prohibited by the first sentence from carrying on or being engaged or interested in any business of an identified kind. The identified kind of business is a business which does any business with any of the Specified Corporations, if the business done with a specified corporation is of a nature similar to the business conducted by any of the Morris/Corbett companies, or any significant component of the business conducted by any of the Morris/Corbett companies. (4) Mr Corbett is prohibited from carrying on, or being engaged or interested in any such business: · directly or indirectly; · solely; · jointly with any person or corporation; or · as a director, manager, agent or servant of any person or corporation. (5) The second sentence of the clause releases the following conduct from the prohibition in the first sentence: · Mr Corbett providing his professional services as an architect to any of the Specified Corporations; · Mr Corbett providing his professional services as an architect to any corporation that provides services to any of the Specified Corporations; and · Mr Corbett working as an employee on wages for any person firm or corporation whatsoever. These three forms of conduct by Mr Corbett are "safe harbours"; that is, they are permitted by the second sentence even if they amount to carrying on or being engaged or interested in the business which does business with a specified corporation of a nature similar to the business of a Morris/Corbett company. (6) Since the second sentence permits Mr Corbett to work as an employee on wages for any entity, the prohibition in the first sentence on his carrying on, being engaged or interested in a business as a servant of an entity will only ever apply where Mr Corbett is employed by an entity under some arrangements which are not merely employment on wages. 30 Counsel for the plaintiffs contended that the second sentence of clause 15 was confined to work as an employee in the provision of architectural services. I reject that construction of clause 15. Literally, it creates two "safe harbours", neither of which is limited by the other. It permits Mr Corbett to provide architectural services in any fashion, whether as an employee or otherwise, and it permits him to do anything so long as it is work as an employee on wages, whether in the field of architectural services or otherwise. I see no commercial or other reason for implying a restriction upon the plain words of the clause. 31 Counsel for the plaintiffs also submitted that the reference to "working as an employee on wages", when read together with the words "director, manager, agent or servant" in the first sentence of the clause, should be limited so as not to include work at an executive or management level. Again, there is no such restriction in the wording of the second sentence, and I see no commercial or other reason for implying it. Possibly, the correct construction of the clause would have been otherwise if the first sentence had identified only work as a director or manager. Then one might be able to argue that the effect of the clause, considered as a whole, was that engagement at a managerial level was to be prohibited but engagement as and employee on a non-managerial level was to be permitted. Reasoning of that sort is excluded by the presence, in the first sentence, of the word "servant". The effect of the two sentences, read together, is to permit any form of employment on wages, whether at a managerial level or otherwise, but to prevent engagement as a director, manager or agent, or engagement as a servant otherwise than as an employee on wages. For example, engagement as an employee on commission would be prohibited. 32 By clause 17 of the Deed, Mr Corbett and Mr Morris warrant to one another that they have disclosed all matters affecting the business capital or affairs of the Morris/Corbett companies, and Mr Corbett covenants that he will inform Mr Morris of any such matters which come to his attention during the period of five years after completion of the agreement. 33 The Agreement is also dated 24 September 1990. It is drafted in a style different from the drafting style of the Deed, suggesting that it was probably prepared without legal assistance. Only Mr Morris and Mr Corbett are parties to it. It records a series of supplementary agreements as to the ownership of various assets and the discharge of certain payment obligations, and it deals with profit-sharing on new projects and HCF projects. Clause 8 provides that work on HCF projects is to be retained by Renbay Systems with the net profit being split 90% to Renbay Systems and 10% to Mr Corbett. Clause 3 provides that the sum of $10,000 will pass from Renbay Systems to Valpar by way of fee paid on the date of the Agreement. 34 Clause 9 says that any information given by Mr Corbett to staff or clients or any other party must first be discussed and agreed with Mr Morris. Clause 9 records that initially Mr Corbett will say that he is taking some time off until Christmas and concentrating more time on marketing and estimating, and less on running jobs. The clause says that the day-to-day running of the company is to become Mr Morris's area of responsibility. It says that in the new year (1991) when it is agreed that the time is right with staff and clients, Mr Morris and Mr Corbett will announce that Mr Corbett has decided to sell his interest in Renbay to Mr Morris. In this way, clause 9 contemplates that staff and clients are to be misled as to the ongoing business relationship of Mr Morris and Mr Corbett, by agreement between them. 35 Clauses 5 and 6 of the Agreement have some importance in the dispute between the parties. They are as follows: "5. It is agreed that Paul W Corbett will work for Renbay Systems Pty Ltd/Barry M Morris at times suitable to both parties carry out Project Management/Marketing/Estimations type works commencing January 1991 at the rate of $50 per hour including normal expenses. In addition Paul W Corbett will continue to work for Renbay Systems Pty Ltd in a marketing role with St George Building Society for a suitable introductory period to enable Barry M Morris to continue the relationship between Renbay Systems and St George Building Society. 6. Should any member of staff elect to leave or be discharged and approach Paul W Corbett for employment, then Paul W Corbett shall immediately contact Barry M Morris informing him of this. Clause 18 of the agreement applies. Permission will not be withheld by Barry M Morris subject to a suitable agreement regarding workload commitments by existing employees. Refer clause 15 of the agreement." [The references to clauses 18 and 15 of the Agreement seem to be intended to refer to clauses of the Deed, but there is no clause 18 in the Deed.] The pleadings and the plaintiffs' modification at the hearing 36 By their statement of claim, the plaintiffs make three claims against Mr Corbett.