New South Wales Supreme Court CITATION : Austress-Freyssinet Pty Limited & Ors v Kowalski [2007] NSWSC 399 HEARING DATE(S) : 21 and 22 February 2007 JUDGMENT DATE : 27 April 2007 JURISDICTION : Equity Division JUDGMENT OF : Windeyer J at 1 DECISION : Injunction to restrain conduct in breach of restraint of trade provision. CATCHWORDS : CONTRACTS - restraint of trade - restraint period of three years after termination of agreement by exercise of option - restraint pursuant to shareholders agreement not solely employment agreement - whether restraint contrary to public policy - whether restraint period reasonable LEGISLATION CITED : Restraints of Trade Act 1976 Cactus Imaging Pty Limited v Peters [2006] NSW SC 717 CASES CITED : Connors Bros Ltd v Conners [1940] 4 All ER 179 Stenhouse Australia Ltd v Phillips [1973] 2 NSWLR 691 Austress-Freyssinet Pty Limited (First Plaintiff) Austress-PSC Design Pty Limited (Second Plaintiff) PARTIES : Freyssinet SAS (Third Plaintiff) Immer (No 141) Pty Limited (Fourth Plaintiff) Andrew Anthony Kowalski (Defendant) FILE NUMBER(S) : SC 3164 of 2006 COUNSEL : Mr P M Wood with him Mr M Izzo (Plaintiffs) Mr S T White SC (Defendant) SOLICITORS : Mallesons Stephen Jaques (Plaintiffs) Harris Freidman Hyde Page (Defendant) - 14 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WINDEYER J FRIDAY 27 APRIL 2007 3164/06 AUSTRESS-FREYSSINET PTY LIMITED & 3 ORS V ANDREW ANTHONY KOWALSKI JUDGMENT Issue 1 Whether a restraint clause in a contract should be enforced. Parties 2 The plaintiff, Austress-Freyssinet Pty Limited (Austress) is a company, the shares of which are owned as to 20% by Freyssinet SAS (Freyssinet), the third plaintiff, and as to 80% by Immer (No 141) Pty Limited (Immer), the fourth plaintiff. Austress in turn owns 100% of the shares in Austress-Freyssinet (Vic) Pty Limited, but that company is not a party. 3 Immer is a company, the shares of which are owned as to 75% of voting shares and 68.75% of ordinary shares by Freyssinet and as to 25% of voting shares and 31.25% of ordinary shares by Andrew Kowalski, the defendant, (Kowalski). Separate trial 4 On 1 December 2006 I ordered that there be a separate hearing of the claims for relief of the third and fourth plaintiffs on the restraint claims. This judgment is on those separate claims. Facts 5 Kowalski was employed as managing director of Austress from at least 1999 until 2005. He had been a director since 1984. Austress is a specialist construction contractor engaged in various areas of endeavour described as "structures (geo-technical) work, remedial work and products". It has offices in Sydney, Melbourne and Brisbane and in New Zealand. Its principal activities are in Australia but it has had contracts in Indonesia, Hong Kong, Malaysia and perhaps other parts of Asia. Its expertise is in what is called "pre-stressing or pre-tensioning" of concrete. 6 In 1992 a shareholders agreement was entered into between Freyssinet, Austress, Immer, Kowalski and Mr Hay, Mr Young and A W Edwards Pty Limited, which related to the operation of Immer and Austress. Prior to that time the share capital of Immer was held in various proportions by the last four persons, but in 1992 Freyssinet bought into Immer and acquired 62.5% of the ordinary non-voting shares and 50% of the voting shares. Thereafter there were various rearrangements of shareholdings and capital, as a result of which the only two shareholders in Immer that remained were Freyssinet and Kowalski. As a result of the various changes it was apparently decided that a new shareholders agreement should be entered into between Immer, Austress, Freyssinet and Kowalski. That agreement was subject to extensive negotiation over a period. The provisions of the shareholders agreement relevant for this decision include the following: 2 Composition of the Immer Board There shall be three Directors on the Immer Board, or such greater number as the Immer Shareholders decide by unanimous resolution. Mr Kowalski may appoint and remove one Director (initially, Mr Kowalski). Freyssinet may appoint and remove two Directors (initially, M. Dupety and M. Grolimund). The Chairman of the Immer Board will be appointed by Freyssinet. Initially, it will be M. Dupety. In his absence, it will be M. Grolimund. … 3 Option over Immer Shares 3.1 Immer Call Option Mr Kowalski grants Freyssinet a call option over all of his shares in the capital of Immer at the Immer Exercise Price ("Immer Call Option"). 3.2 Immer Call Option Exercise Date The Immer Call Option may be exercised by Freyssinet at any time on or after 1 July 2009, by giving a two month notice in writing to Mr Kowalski, 3.3 Immer Put Option Mr Kowalski shall have a put option to sell all of his Immer Shares to Freyssinet at the Immer Exercise Price ("Immer Put Option"). The Immer Put Option may be exercised: (a) By Mr Kowalski if, by decision of the Board of Austress, he ceases to be the Managing Director of Austress (b) by Mr Kowalski, if he is prevented from continuing his employment with the Company due to any disability; or (c) by Mr Kowalski's executors (or by the relevant beneficiary of his estate, if applicable) if Mr Kowalski dies. This clause 3.3 ("Immer Put Option") shall continue after Mr Kowalski's death, for the benefit of his executors and beneficiaries. 3.4 Settlement If the Immer Call Option or the Immer Put Option is exercised, settlement will occur within 60 days. Upon settlement, Mr Kowalski (or his executors or beneficiary, as applicable) will transfer the Immer Shares free of any Encumbrance, upon payment of an amount equal to the Immer Exercise Price minus any amount then owing under the Loan Facility. … 6 Composition of the Austress Board There shall be five Directors on the Austress Board, or such greater number as the Austress Shareholders decide by unanimous resolution. Immer may appoint and remove one Director (initially Mr. Kowalski). Freyssinet may appoint and remove four Directors (initially M. Dupety and M. Grolimund, and two others). The Chairman of the Austress Board will be appointed by Freyssinet. Initially, it will be M. Dupety. In his absence, it will be M. Grolimund. … 8 Managing Director of each Company 8.1 Appointment From the date of this agreement, Mr Kowalski will be the Managing Director of each Company. He will be responsible for the policies of each Company and will oversee the overall management of each Company's Business. The relevant Board may: (a) appoint, remove and replace the Managing Director, and (b) delegate any of its powers to the Managing Director. 8.2 Managing Director's salary The Managing Director of each Company will receive remuneration in accordance with the terms of their employment agreement, which must be approved by the relevant Board. 8.3 Matters for which Managing Director must consult and agree with Freyssinet The Managing Director of each Company must seek the prior approval in writing of Freyssinet before: (a) (investments) making an investment or disposal of any part of its assets or business where the value of the investment or disposal exceeds $250,000; (b) (leasing contracts) entering into any leasing contracts where the value of the contract exceeds $250,000; (c) (property leases) entering into any contracts relating to property leases or subleases; (d) (loans) entering into any contracts relating to loans or lines of credit and opening and managing bank accounts; (e) (guarantees) entering into or becoming liable under any guarantee, including bond issuances or indemnity where the value of the guarantee and indemnity exceeds $250,000; (f) (partnerships) entering into any partnership or joint venture agreements; (g) (bids) entering into any contracts involving bids or offers exceeding $3,000,000 or works exceeding 1 year, and (h) (employment) employing, terminating, setting or changing the remuneration terms for any senior staff. … 9 General Provisions concerning both Boards 9.11 Duties of Directors The Directors of each Company must act in good faith and in the best interests of that Company as a whole. Subject to this duty, a Director may have regard to and act in the interests of their appointor. … 16 Restraint 16.1 Restraint Mr Kowalski undertakes to Freyssinet that during the term of this agreement, and for a further: (a) 3 years; (b) 2 years; (c) 1 year, he will not: (d) be Involved in any capacity in any business or activity which is the same as or similar to the Business or any material part of it; or (e) solicit anyone who is a customer of the Business; or (f) entice away or endeavour to entice away from a Company or the Business any employee or anyone who was at any time a Director, agent, Representative, associate or adviser to the Business. Mr Kowalski undertakes to Freyssinet that at any time after date of this agreement he will not: (a) use or disclose any Confidential Information of a Company, except as required by law; or (b) use a logo, symbol, trademark or business name substantially identical or deceptively similar to a trade mark or business name. 16.2 Deletion of restrictions If any part of the restraints in clause 16.1 ("Restraint") is judged to go beyond what is reasonable in the circumstances and necessary to protect the goodwill of the Business but would be judged reasonable and necessary if any activity were deleted or a period or area were reduced, then the restraint in clause 16.1 "Restraint" applies with that activity deleted or period or area reduced by the minimum amount necessary to make the restraint reasonable in the circumstances. 16.3 Severance Each part of the restraint in clause 16.1 ("Restraint") has effect as a separate and severable prohibition or restriction and is to be enforced accordingly. 16.4 Acknowledgment Mr Kowalski acknowledges that the restraint in clause 16.1 ("Restraint") is reasonable in the circumstances and necessary to protect the goodwill of the Business. 17 Confidentiality 17.1 Confidential information Except as required by law the Shareholders shall not disclose or permit to be disclosed to any third party any Confidential Information of a Company or any Confidential Information of the Shareholders except: (a) in the case of Confidential Information of the Shareholders with the consent of the Shareholders; or (b) in the case of Confidential Information of the Company with the consent of the Board. … 21 General … 21.10 Entire Agreement This agreement, the articles of association of each Immer and Austress constitute the entire agreement of the parties about the subject matter and supersedes all previous agreements, understandings and negotiations on that subject matter. … 23 Interpretation 23.1 Definitions … Business means: (a) in relation to Immer, the business of acting as the holding company of Austress; and (b) in relation to Austress, the design, construction, repair and monitoring of pre-stressed buildings and other structures. … Confidential Information means: (a) in respect of Immer, all confidential, non-public or proprietary information regardless of how the information is stored or delivered, exchanged between the parties before, on or after the date of this agreement relating to the Immer Business, technology or other affairs of Immer, and (b) in respect of Austress, all confidential, non-public or proprietary information regardless of how the information is stored and delivered, exchanged between the parties before, on or after the date of this agreement relating to the Austress Business, technology or other affairs of Austress. … Involved includes direct or indirect involvement as a principal, agent, partner, employee, shareholder, unitholder, director, trustee, beneficiary, manager, consultant, adviser or financier. 7 The definition section also sets out the manner of calculation of the Immer Exercise Price referred to in the option clauses by a somewhat complicated formula. The evidence shows that the Exercise Price as at 31 December 2004 would have been approximately $7,142,000. The formula is in part based on profits of Immer and turnover of Austress in the three years prior to option exercise. 8 At the time of the second shareholders agreement Freyssinet agreed to lend to Kowalski the sum of $1,632,000 which sum previously had been drawn by him from Austress. There is a dispute about this to be determined in the action in due course. Quite how the amount was adjusted between Freyssinet and Austress does not matter. The loan agreement provides for a repayment date, being the date Freyssinet acquires the shares of Kowalski in Immer. Interest is payable by the defendant, but payment is deferred until the repayment date. 9 Kowalski was removed as managing director of Austress in November 2005 by resolution of the directors. He has not exercised his put option. He remains a director of Immer. During his period as managing director of Austress he had access to and knowledge of all matters relating to its business, including budgets, market share pricing, operating margins and business opportunities. 10 In March 2006, Kowalski became a director of a company, then Hiloft Pty Limited, now NT Pre-Stressing Pty Limited (NT Pre-Stressing). In May 2006 Kowalski became a shareholder in a company, then Ventor Holdings Pty Limited, now Global Concrete Industries Pty Limited (Global). Global since 19 May 2006 has owned 100% of the share capital of NT Pre-Stressing. NT Pre-Stressing is engaged in the same type of pre-stressing work as Austress. It has obtained a contract for work in Melbourne for which Austress was a tenderer. It also successfully tendered for jobs at Willoughby and Berowra where Austress was an unsuccessful tenderer. Mr Kowalski is well known in the industry and has been an industry leader for at least 20 years. Orders sought 11 Freyssinet seeks orders against Kowalski restraining him in terms of paragraph 16 of the shareholders agreement. In the alternative it seeks an injunction which would restrain Kowalski from exercising his rights and powers as a shareholder of Global and as a director of NT Pre-Stressing unless and until he divests himself of his shareholding in Global and ceases to be a director of NT Pre-Stressing. He could hardly exercise those powers after he so ceased, but presumably what is sought is an order restraining him from exercising any rights as a shareholder or a director during the restraint period. Immer seeks an injunctive order restraining Kowalski from exercising his rights as a shareholder or a director for the same period, which I have said, is somewhat circular. 12 The question then is whether or not the restraint can be enforced. The law and general principles which apply in this State in such cases were clearly stated by Brereton J in Cactus Imaging Pty Limited v Peters [2006] NSW SC 717. Counsel for the plaintiff relied upon this decision, particularly paragraphs 10 and 11, which are as follows: 10 Although at common law a restraint of trade is contrary to public policy and void unless it is justified by the special circumstances of the particular case (for which purpose it is sufficient justification that the restriction is reasonable having regard to the interests of the parties concerned and in reference to the interests of the public, so that while affording adequate protection to the party in whose favour it is imposed, it is not injurious to the public) [ Nordenfelt v Maxim Nordenfelt Guns & Ammunition [1894] AC 535, 565; Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 706, 707; Lindner v Murdock's Garage (1950) 83 CLR 628, 653], in New South Wales a restraint is valid to the extent to which it is not against public policy, even if not in severable terms [ Restraints of Trade Act , 1976 (NSW) s 4(1); Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449, [26]-[27]]. The effect of the Restraints of Trade Act is that, in New South Wales, one approaches this type of case by determining, first, whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed; secondly, whether the restraint in its application to that breach is against public policy; and thirdly, if it is not, then in its application to the alleged infringing conduct, the restraint is valid unless the court makes an order under Restraints of Trade Act , s 4(3) [ Orton v Melman [1981] 1 NSWLR 583; Woolworths Limited v Olson [2004] NSWCA 372, [42]]. That is because the effect of the Restraints of Trade Act , s 4(1), is to require that, for the purpose of determining the validity of a restraint, attention be focussed on the actual or apprehended breach, rather than on imaginary or potential breaches. 11 While the same general principle applies in all cases of restraint of trade, a stricter and less favourable view is taken in respect of covenants in restraint of trade between employer and employee than in commercial agreements for sale of goodwill [ Nordenfelt , 566; Mason v Provident Clothing & Supply Co Limited [1913] AC 724, 731, 738; Herbert Morris Ltd v Saxelby ; Geraghty v Minter (1979) 142 CLR 177, 185; Woolworths Limited v Olson , [38]; J D Heydon, The Restraint of Trade Doctrine , 2nd Ed, pp68-69]. An employer is not entitled to be protected against mere competition, and the legitimate interests of an employer which may be the subject of protection by covenant are in the nature of proprietary interests [ Vandervell Products Ltd v McLeod [1956] RPC 185, 192; Tank Lining Corp v Dunlop Industrial Pty Ltd (1982) 140 DLR (3d) 659, 664], including the employer's trade secrets and confidential information, and the employer's goodwill including customer connection. In this case, Cactus seeks to support the restraint on solicitation of customers on the basis of protection of both its confidential information and its customer connection. 13 I adopt that reasoning. When one approaches the matter in accordance with these principles, then, as it is clear the present conduct of the defendant is in breach of the restraint provisions, it is necessary to determine whether the restraint, in its application to the present conduct and contemplated conduct in breach, is contrary to public policy. 14 It is, I think, important to realise that the shareholders agreement is far more than an employment contract. Kowalski is a shareholder in Immer. No doubt he has worked hard to build up the value of Austress and thus Immer. Freyssinet has presumably paid a proper price for the shares it has obtained in Immer as a result of the first shareholders agreement and subsequent purchases from the shareholders. Although the second agreement brought to an end all rights under the first agreement it is not irrelevant that the first contained a restraint covenant, somewhat similar to, but not as wide as the present covenant. The original agreement was primarily a commercial agreement for the acquisition of the shares, but it involved an employment agreement. The existing shareholders agreement should be treated in the same way. One of its purposes was to ensure that Kowalski would not be locked into Immer as a minority shareholder, but would be entitled to require Freyssinet to purchase his shares at a price fixed by a negotiated formula. That option can be exercised by Kowalski now but the call option cannot be exercised by Freyssinet until 2009. There is no time limit by which either option must be exercised. 15 The main argument advanced by Mr P M Wood for the plaintiff was that the purpose of the restraint was to retain the value not only of the business of Austress and Immer if Kowalski left, but to maintain the value after the put or call option was exercised. While it might appear strange to have a restraint period which could continue at least until 2012 and probably longer - although Kowalski by putting his shares at the time he was removed as managing director, could have limited it to 2008 - this was justified because it was important to Freyssinet to keep value in its investment in both Austress and Immer, particularly as it could be required to, and had the right to, increase its investment in Immer. That argument may seem strange at first blush, because if the company became worth less as a result of Kowalski's involvement in competing businesses then the option exercise price would be less, but in fact the argument has considerable strength. Kowalski could put his shares to Immer, taking advantage of the exercise of the price at the date (which depended in part on results over the past three years), but his activities with the new companies could well result in lower earnings and less profits for Austress and thus Immer in the future. This is not a pure employment restraint upon which the court frowns. It is a restraint originally entered into (but in somewhat different terms) in 1992 as a business arrangement between vendor and purchaser of shares in Immer, protecting the interests of the purchaser. Later, in the second agreement, it continued such protection as part of the arrangement for the obligations and rights under the put and call options, protecting a legitimate interest in retaining the value of a business important either for future earnings or for future sale. Vendors of business or of shares in companies managing businesses may have proper reason to enter into restraint covenants to add value to what they are selling; see cases listed in para 11 of Cactus and Connors Bros Ltd v Conners [1940] 4 All ER 179 at 191-2. The same reasoning applies to persons negotiating put and call options. Such a restraint is, in my view, not contrary to public policy. Freyssinet's interest was to secure the value of its investment and probable increased investment in Immer and in Austress directly or through Immer. It was not argued that it was not a valid restraint as it was to protect a subsidiary and sub-subsidiary: Stenhouse Australia Ltd v Phillips [1973] 2 NSWLR 691. I defer consideration of the extent of restraint until later in this judgment. 16 It is also argued that the restraint is justified to protect information which is confidential to the plaintiff. There is a specific undertaking about this at the end of clause 16.1 of the shareholders agreement which I think is more relevant to relief by way of injunction or damages going to breach of contract. However, the fact a person has access to confidential information may justify restraint, in both a business sale type situation and an employment situation. In the present case it is information of past or budgeted proposed margins and methods of pricing and pricing systems which is claimed to be of value to a competitor. While that may be true, I agree with the argument of Mr Simpkins SC, for the defendant, that such information quickly goes out of date and is of little value, particularly in this case where the information of Austress is already two years old. It was Austress which had the information, not Immer, although Immer would have been aware of it in a general way. In view of the decision to which I have come, this does not really matter. The existence of and access to confidential information could justify some restraint but would be of less strength than the restraint appropriate for the purpose of retaining the value of the business. I consider a two year time period from dismissal a maximum, so that while this argument could justify an injunction now, that would be for a term written down in accordance with the Restraints of Trade Act 1976. The case on retaining the value of the business supports a longer restraint. 17 I turn to the scope of the restraint. While the agreement does explicitly not provide for termination it is apparent that the agreement will end if and when one or other of the put or call options is exercised. Thus Kowalski can bring it to an end at any time by exercising the rights under the put option and Immer can bring it to an end at any time after 1 July 2009. The time period and geographical area of restraint must be considered bearing this in mind. 18 I return to the extent of restraint. The area of restraint is unlimited. It seems to me that this is obviously unreasonable. Neither Austress nor Immer was operating worldwide at the time of the agreement. There was nothing to show either company intended to do so. It is accepted a restraint over Australia would be reasonable if there were no other objection to the restraint. The evidence is sparse but it does establish operations and carrying out of contracts in Australia, New Zealand, Hong Kong and Indonesia and at some time in the Philippines. The company profile, which is in evidence, sets out the area of operations as Australia, Indonesia, Hong Kong, Malaysia, New Zealand, the South Pacific Islands, Vietnam and the Philippines. While the evidence of Mr Grolimund, the chief financial officer of Freyssinet, is somewhat vague as to this, the profile is in evidence. Mr Kowalski gave no evidence to challenge its contents, but as Mr Grolimund had no idea what was meant by the "South Pacific Islands" and there was no evidence of any work being done there, I think it must be excluded. Apart from that, the restraint should be limited to the areas claimed as areas of operation. 19 I turn to the time. In considering this the following matters are significant: (a) the period was agreed after negotiation; (b) Kowalski did get substantial benefits from the shareholders agreement, including the put option, a good salary and a degree of independence from the board; (c) the benefit of the put option enures for his estate; (e) Freyssinet had a real interest in maintaining the value of its business, particularly after Kowalski left; (f) Kowalski had been with Austress and in this type of business for over 20 years so that departure to a competitor could be thought to be very detrimental to the value of Immer as a company. The present breach should be restrained in any event as the restraint has been in operation for only about 17 months and I consider a restraint beyond that time reasonable. There is an obvious conflict while Kowalski remains a director of NT Pre-Stressing. However, it is necessary to determine in relation to future contemplated conduct whether the constraint period is reasonable or contrary to public policy. 20 Three years may seem a long time, especially when one looks at it from 2009. However, by then Kowalski will be only 59 or 60 years of age, not a person due to retire, still able to be involved with a competing business; and as I have said, it was open to him to bring about a position where the restraint period would in fact have ended in December 2008. The fact that he has not done so would indicate that he considers that his shares are worth keeping. The plaintiff's aim is to ensure that they remain of value when and after it acquires those shares by its choice, or when forced to do so. In the particular facts of this case and the somewhat strange and particular contract, I do not consider the longer period unreasonable. 21 The restraint from being a shareholder in a competing company is too wide as it could prevent investment in major publicly listed construction companies. The restraint in this aspect should not restrict Mr Kowalski from being a shareholder in a public company listed on the Stock Exchange of any country. 22 An order should be made restraining Kowalski from acting in breach of the restraint clause. The alternate order sought is thus not required nor is it, I think, an appropriate order at least so far as it seeks to restrain conduct of a director which may required as a matter of law by a director. 23 The plaintiff should bring in a draft order to give effect to the judgment. I will then make the injunction and give directions for the conduct of the balance of the action. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.