Hally Labels Ltd v Kevin Powell

• Jurisdiction: New Zealand
• Judge: B S Travis
• Judgment Date: 16 June 2011
• Court: Employment Court
• Docket Number: ARC 35/11
• Date: 16 June 2011

In the Matter of proceedings removed from the Employment Relations Authority

BETWEEN

Hally Labels Limited

Plaintiff

and

Kevin Powell

Defendant

[2011] NZEmpC 63

ARC 35/11

IN THE EMPLOYMENT COURT AUCKLAND

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.

Appearances:

Chris Patterson and Shelley Kopu, counsel for plaintiff

Andrew Gallie, counsel for defendant

REASONS FOR JUDGMENT OF JUDGE B S Travis

Introduction

1 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.

2 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.

3 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.

The proceedings

4 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.

5 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.

6 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.

7 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.

8 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 interim injunction proceedings and the claims in the High Court for relief against the defendant and Geon were not within the jurisdiction of this Court.

9 In the meantime the parties had jointly applied to the Authority, under s 178 of the Employment Relations Act 2000, to have the substantive restraint proceedings removed to the Employment Court to be heard and determined without the Authority investigating the matter. This was based on the grounds that important questions of law were likely to arise in the matter to be investigated by the Authority, other than incidentally and which had been identified by the Court in its decision on the interim injunction challenge. On 23 May the Authority issued a determination removing the substantive matter to the Court. 2

10 Counsel then agreed that rather than determine the disputed issue of whether or not the interim application should be re-opened, urgency should be granted to the substantive proceedings and on 24 May counsel agreed to a fixture for the substantive restraint issue, commencing on Tuesday 7 June, and continuing on to Friday 10 June.

11 Initially it was contemplated that Hally would file and serve, by 27 May, a statement of claim including allegations of breaches of the employment agreement whether express or implied, in relation to confidentiality, competition or fidelity, in addition to the claim for enforcement of the restraint provisions. Such a statement of claim was filed and it alleged that in May 2011 Hally learned that between September and December 2010, and prior to his resignation, the defendant accessed and copied confidential information by accessing computer files and attaching USB devices to his laptop computer. These allegations have been denied.

12 Against the objections of Hally, I ruled, on 2 June, that the defendant could not adequately prepare his defence to the extensive allegations now being made against him, as a result of the search of Hally's laptop which the defendant had used, as there were only effectively two working days left before the commencement of the hearing. I also found there was a very real risk that either the plaintiff or the defendant might wish to apply for a rehearing when additional information, particularly from Geon, as a result of the search order in the High Court, came to light. I found, therefore, that the allegations of breach of confidentiality, fidelity and good faith were not ready for hearing and that the issues of whether there was an enforceable restraint and whether it had been properly cancelled, were separate from any allegations of breach of confidentiality. I found that the issues which influenced me in declining the interim relief on the implied undertaking would not be relevant in considering the substantive issues and whether a permanent injunction should be granted. I considered the documents found as a result of the search could be relevant

in considering whether the original restraint was justified to protect the plaintiff's interests and, in particular, its confidential information

13 The plaintiff then applied for leave to file an amended statement of claim, which was opposed by the defendant. That opposedapplication was heard on 3 June. Mr Patterson argued that there was an important issue from Hally's perspective as to whether or not the defendant was in breach of the employment agreement at the time he purported to cancel the restraint provisions and that, if he was in such breach, this could deprive the defendant of the right to cancel. The issue of whether each of the documents relied on by Hally to establish the breach of confidence fell into the confidential category would have taken up more time for determination than the urgent fixture allowed.

14 For this reason it was agreed that, for the purposes of the Court's enquiry into the enforceability of the restraint and to determine the issue relating to the legitimacy or otherwise of the defendant's cancellation, the documents alleged to have been in the possession of the defendant and located as a result of the search order were to be assumed to hold the status of confidential information belonging to Hally. That concession by the defendant was made for the limited purposes of the...