Hally Labels Ltd v Kevin Powell
 NZEmpC 63
IN THE EMPLOYMENT COURT AUCKLAND
In the Matter of proceedings removed from the Employment Relations Authority
Chris Patterson and Shelley Kopu, counsel for plaintiff
Andrew Gallie, counsel for defendant
Reasons for issuing of a permanent injunction enforcing a restraint of trade — defendant subject to 12 month restraint preventing him from working in adhesive label manufacturing industry in New Zealand and Australia — plaintiff agreed to make payment of six months salary as consideration for restraint — whether timing of payment an essential term — whether defendant required to give notice of cancellation for non-payment of consideration or whether non-payment met requirements of s7(4)(b) Contractual Remedies Act 1979 (cancellation of contract — breach) — whether defendant was entitled to cancel the contract for breach of the employment agreement by retaining confidential information — whether restraint enforceable.
Held: The restraint clause was silent as to the timing of the payment. In the absence of any time, in order give business efficacy to the contract, it should be implied that the restraint was to take effect before or after termination of the 2010 agreement, namely the expiry of the two month notice period on 7th February. At that time a single payment of the consideration ought to have been made if P had not indicated to Hally that he was not prepared to be bound by the restraint as written. Hally was not entitled to drip feed the payments over a 12 month period, because the clause had contemplated a payment, not 12 separate payments.
However Hally had not been in breach because the clause had been silent as to time of payment and this issue was resolved by implication of a term. The precise time of payment would not have been known to Hally in the absence of anyone drawing that assertion to its notice. P had not asserted that he required payment by any particular time. Further the implied term did not resolve how much should be paid, given that there was an argument as to whether the restraint was reasonable and whether it should be reduced to no more than six months on payment of three months' salary. Therefore there had not been a breach pursuant to s7(4)(b) CRA.
Had there been no communications between the parties which had put the timing and the amount of the payment at large, the Court would have been inclined to accept P's submission it was necessary to imply a term as to timing and that timing would have been an essential term. As a general rule, in the absence of an express provision, notice must be given. P had been obliged to have made time of the essence for the payment of consideration. In the absence of notice, P was not entitled to cancel under s7(4)(a) CRA.
P's communications clearly gave Hally the impression that it need not immediately make payment of the consideration for the restraint, as the amount of the consideration for any alternative proposal was yet to be agreed, together with its timing. The communications were ongoing at the expiry of the notice period and at the time P purported to cancel the contract. The communications could be described as negotiations. P's conduct had both affirmed the contract and waived the essential requirement that six months' salary be paid at the completion of the two month notice period.
A party could not cancel a contract if that party was already in breach. By retaining confidential information, P had breached implied terms of trust and fidelity. This disqualified him from cancelling the contract because he had not been ready and willing to perform the terms of the restraint.
Hally and Geon both worked in the adhesive label market in New Zealand and Australia, so the value of the restraint to Hally would be reduced if it did not apply to both countries. Since 2001 it was common to regard the whole of New Zealand as one market for certain enterprises ( ). The specific activities sought to be restricted were limited to the adhesive label manufacturing industry and the restraint was reasonably narrow. P had held a senior position and been employed with Hally for over 22 years. P was one of Hally's key personnel in developing new business, and the trialling of products could take at least 12 months. P had also shown he was willing to be bound for six months. Hally had been prepared to pay half of P's salary for the 12 month period. This was separate consideration for the restraint. In all the circumstances, the duration was not unreasonable.
While it was possible to modify the terms of restraints downwards under s8 Illegal Contracts Act (Restraints of trade), it was doubtful that there was a power to extend the restraint by six months to recognise of P's wrongful retention of Hally's confidential information and his intent to use it for his new employer's benefit.
REASONS FOR JUDGMENT OF JUDGE B S Travis
On 13 June 2011, I issued two declarations and a permanent injunction enforcing a restraint. These are my reasons for so doing although they were issued in draft form to the parties on 13 June 2011.
In the hearing the plaintiff (Hally) sought to enforce a restraint preventing the defendant from being employed in any business in the adhesive label manufacturing industry within New Zealand or Australia. The hearing, which was set down as a matter of urgency, was limited to the plaintiff seeking a declaration that the purported cancellation of the restraint of trade by the defendant was invalid and the granting of both interim and permanent injunctions enforcing the restraint. The plaintiff also sought a declaration that the defendant had breached the terms of the employment agreement between the parties by breaching the restraint of trade.
The plaintiff's proceedings against the defendant in this Court also seek declarations that the defendant has breached his obligations of confidence and his duties of fidelity and of good faith. Damages are to be sought if the plaintiff is successful. These are allegations which will, if necessary, be dealt with in a subsequent hearing. However, for reasons which I will give later, I ruled that the Court would determine the allegation that the defendant had breached the employment agreement by retaining confidential information and was thereby disentitled to cancel the restraint.
Hally applied to the Employment Relations Authority on 30 March 2011 for remedies for the defendant's alleged breach of the restraint and sought an interim injunction to enforce it.
The investigation meeting for the interim relief unfortunately did not take place until 2 May 2011 and the Authority issued a very prompt determination on 5 May declining the relief sought. This determination was challenged by the plaintiff and dismissed by me in an oral judgment issued on 13 May 2011 1.
I found that there were a number of serious issues to be tried as to the reasonableness of the restraint and as to its enforceability. It was alleged that Hally had breached the agreement by not paying the consideration for the restraint as required and that the effect of this was that the defendant was entitled to rely on that failure as a defence to Hally's enforcement of the restraint and that such breach had entitled the defendant to cancel the agreement. There was a further issue as to whether the defendant was required to give notice to Hally of his intention to treat the contract as discharged for non fulfilment of the requirement to pay the agreed consideration within a reasonable time, before being able to exercise the right to cancel under the Contractual Remedies Act 1979. There was also an issue as to whether the defendant had affirmed the contract and thereby lost the right to cancel.
At the time I heard the interim injunction challenge I was advised that the Authority would be investigating the substantive matter for two days commencing on 26 May 2011. The defendant had been employed since 28 March 2011 by Kiwi Labels Ltd (Kiwi), a division of the Geon Group Ltd (Geon), a competitor of Hally in the adhesive label industry. I was advised by the defendant that in the interim period he was not being employed to attack Hally's customer base but only in servicing existing clients of Geon and that he had undertaken to abide by the balance of the provisions of the employment agreement which dealt with the non-solicitation of Hally's clients and employees and obligations of confidentiality. For these and other reasons set out in my judgment, including delay on the part of Hally, I took the view that the balance of convenience favoured the continuation of the defendant's employment by Geon until the Authority could substantively investigate the matter.
On 23 May 2011, Mr Patterson, counsel for Hally sought the leave of the Court to bring the matter of the interim injunction back before the Court on the basis of developments that had occurred since the issuing of my decision. Those developments included a successful application by Hally to the High Court at Christchurch for a search order against the defendant and Geon, which was issued on 20 May 2011 and executed on 23 May. Hally's application to this Court was opposed by Mr Gallie, counsel for the defendant, on the grounds that the circumstances disclosed in the affidavits filed in the High Court in support of the application for a search order did not undermine the implied undertaking the defendant had given the...
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