Linwar Securities Pty Ltd v Christopher Savage [2006] NSWSC 786

New South Wales Supreme Court

CITATION : Linwar Securities Pty Ltd v Christopher Savage [2006] NSWSC 786

HEARING DATE(S) : 01/08/06, 02/08/06

JUDGMENT DATE : 7 August 2006

JUDGMENT OF : Nicholas J

DECISION : para 46

CATCHWORDS : RESTRAINT OF TRADE – Application for interlocutory injunction – whether serious question to be tried as to existence of contract of employment – whether employer had a protectable interest based on employee's connection with clients – whether restraint sought is reasonably necessary to protect employer's interest

Aloha Shangri-La Atlas Cruises Pty Ltd v Gaven [1970] Qd R 438 Attwood v Lamont [1920] 3 KB 571 Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 CASES CITED : Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 Herbert Morris v Saxelby [1916] 1 AC 688 Kolback Securities v Epoch Mining NL (1987) 8 NSWLR 533 Koops v Dean Reeves [2006] NSWSC 449 Lindner v Murdoch's Garage (1950) 83 CLR 628

PARTIES : Linwar Securities Pty Ltd - plaintiff Christopher Savage - defendant

FILE NUMBER(S) : SC 3960/06

COUNSEL : R Goot SC/P Braham - plaintiff R McHugh/J Emmett - defendant

SOLICITORS : Piper Alderman - plaintiff Horton Rhodes - defendant

- IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

Nicholas J

7 August 2006

3960/06 Linwar Securities Pty Ltd v Christopher Savage JUDGMENT 1 His Honour: This is an application by the plaintiff for an interlocutory injunction to restrain the defendant, its employee, from commencing employment or becoming engaged in any other capacity with Goldman Sachs J B Were (Goldman) a competitor. The proceedings came on as a matter of urgency and required prompt determination. That is the reason why these reasons are briefer than they otherwise would have been. 2 Towards the end of submissions on 2 August 2006 the plaintiff stated it would accept an order and undertaking in the following terms (T pp 64, 65): "(1) The defendant be restrained from commencing employment with Goldman until 30 September 2006 which is two months. (2) That the defendant undertake to the court that he will not until 1 February 2007 by his servants or agents, firstly: provide research advice, or any other service to any person or entity which was at 1 August 2006 a client of the plaintiff, with whom he had contact in the course of his employment with the plaintiff. That is he limits this research advice, or any other service to persons other than clients with whom he had dealings whilst he was employed with Linwar, secondly: perform or publish any research whether or not under his name in relation to any ASIC listed company in respect of which he published research in the 12 months ending 30 June 2006 in the course of his employment with the plaintiff". 3 At the same time the defendant, through his counsel, proffered to the court the following undertaking (T p 58): "That he would not until 1 February by himself, his servants or agents, which would necessarily include Goldman, initiate contact in the course of his employment by any means with any client or prospective client, which was not already a client of Goldman Sachs J B Were as at 1 August 2006". Background 4 The plaintiff was established in early 2003. It carries on business as a security dealer primarily servicing the professional investment community. Its principal activities include providing institutional investors, such as superannuation fund managers, with information and advice about ASX-listed companies to assist in making investment decisions; carrying out instructions from institutional investors to purchase or sell such shares on their behalf; the provision of forums (sic) for senior executives of such companies to discuss performance and prospects with institutional investors; and the provision of advice to senior executives of current or proposed ASX-listed companies concerning capital raising activities. 5 Most of the plaintiff's income is earned from fees charged for trading on behalf of institutional investors. Clients are encouraged to effect trades through the plaintiff through the excellence of its published research, and relationships formed with analysts such as the defendant, and research sales employees. The plaintiff also operates a funds management division which invests funds in ASX-listed companies on behalf of institutions. 6 The defendant has been employed by the plaintiff since the commencement of its operations in February 2003. The terms and conditions of the employment contract is disputed. I refer to this question later in these reasons. 7 The defendant's evidence is that in his work he maintains and analyses securities, being small to medium sized companies listed on the ASX. His purpose is to identify companies believed by him to be undervalued or overvalued which provide buying or selling opportunities for the plaintiff's clients. He estimates the fair value of companies by applying a discounted cash flow valuation. He says that the methodology he uses is commonly used by analysts in the market, and that in the process of modelling a company and generating a discounted cash flow valuation he does not use any confidential information acquired through the plaintiff. He says that having made a valuation for a particular company he produces a written research report which includes a summary of information about it and his valuation. He says the report contains no information confidential to the plaintiff. 8 The defendant's role includes marketing his research to the plaintiff's clients which involves explaining buy/sell opportunities to them. He accepted that he himself has no particular clients but deals with clients in co-operation with the plaintiff's dealers or salespeople to whom responsibility is assigned for particular clients. He has no authority to execute buy or sell orders. In the course of his employment the defendant has developed relationships with executives of ASX-listed companies which, amongst other things, afford him a better understanding of a company's performance, strengths and weaknesses. Information gained from executives was useful for the preparation of his reports. 9 The plaintiff asserts that the defendant's reputation amongst institutional investors has been a key factor in its profitability and success. The defendant understands that he has a good reputation as an analyst, and explained that his professional reputation is based primarily on the quality of his published research reports and recommendations. He says that an analyst's reputation is personal rather the product of association with his employer. 10 On 2 May 2003 the initial shareholders of the plaintiff, including the defendant, executed a shareholder agreement which governed their relationship with each other. Relevantly, it included cl 7.6 which provides: "Employment The Corporation will employ each of the Party's Associates on the terms of the agreement contained in Schedule 2". 11 Schedule 2 consisted of a pro-forma letter, entitled "Offer of Employment" (the employment letter) which contained proposed terms of employment with the plaintiff. Clause 6 related to termination. Relevantly, it included: "6.1 You may at any time terminate your employment by giving us one month's notice. 6.2 We may at any time terminate your employment either by giving you one month's notice, or by giving you one month's base remuneration in lieu of notice. 6.3 In the event that either of us gives notice of termination, we reserve the right not to require you to perform any duties during the notice period". 12 Clause 8 thereof sets out post-employment restrictions which, relevantly, are the following: "8.1 For a period of six months after your employment ends, and in order to protect our confidential information (as defined above), you must not: 8.1.1 perform similar work for any competitor; or 8.1.2 assist or be involved with a competitor, in any capacity in which you might be able to use our confidential information to our detriment. 8.2 For a period of six months after your employment ends, you must not have any contact or dealings with any former client of a kind that: 8.2.1 involves any business or services of a kind similar to those conducted or supplied by us; and 8.2.2 might be detrimental to us in any way". 13 The defendant's evidence is that sometime after he signed the shareholders' agreement on 2 May 2003 Mr Christopher Harris, a director and the chief operating officer of the plaintiff, handed him a copy of the employment letter, said it was a copy of an employment agreement, asked him to sign it, and to give it back to him. The defendant says that, until he read it, he was unaware of any post-employment restrictions. The defendant said that he did not sign it or return it to Mr Harris or spoke to him about it. He said that the document he was given was as it appears in Annexure B to his affidavit of 31 July 2006, namely a pro-forma document without the details completed. He did not recall reading cl 7.6 of the shareholders' agreement at the time he signed it. His position was that he did not regard the employment letter as any part of his contract with the plaintiff, and denied an employment contract at all. He says that the only matter relevant to employment which he discussed with officers of the plaintiff was his salary. 14 The defendant denied that Mr Harris gave him an employment letter addressed to him early in April 2006. 15 Mr Harris gave a different version. He said that on about 1 or 2 April 2003 he distributed a personalised copy of the employment letter to each shareholder including the defendant, addressed to each in person. The defendant produced to the court the employment letter addressed to him dated 1 April 2003 (Ex D). 16 By agreement made on 28 April 2005 the defendant and other shareholders in the plaintiff, as vendors, sold to ETRADE Australia Ltd, as purchaser, one half of their shares in the plaintiff (the ETRADE agreement). 17 On the same day the shareholders of the plaintiff made the second shareholders' agreement. Clause 10(a) of Schedule 3 thereof states that Schedule 5 comprised a complete list of the plaintiff's employees as at the date of the agreement. Clause 10(c) stated that, with certain exceptions, the plaintiff was not a party to a written employment or service agreement with an employee. The defendant was not listed in Schedule 5. 18 By letter of 5 July 2006 the defendant gave notice to the plaintiff of his resignation, effective that day. He stated he was giving four weeks notice so that his last day was 2 August, and that he would be starting with his new employer on 3 August 2006. He also informed Mr Harris that he was going to Goldman. 19 The plaintiff responded by letter of 6 July 2006 in which it reminded the defendant of what was said to be his post-employment restrictions set out in cl 8 of the employment contract, and of his obligations concerning confidential information and intellectual property under cll 2 and 7 respectively of that contract. 20 On 7 July 2006 Goldman published an announcement of the defendant's appointment which included the following: "We are pleased to announce that Chris Savage will be joining us in Sydney as an Emerging Company Analyst (anticipated to join us on Thursday 3 August). Chris is currently a highly rated analyst with small cap specialist broker Linwar Securities, having worked at BNP Securities prior to that. Chris will be covering the engineering, support services and information technology sectors within our Emerging Companies team. Likely coverage includes: United Group, Downer EDI, Worley Parsons, Transfield, Coates Hire, Oakton, Reckon, Programmed Maintenance, Caltex and probably the upcoming float of Emeco".