Enforcing overseas restraints of trade in Australia

In a very interesting case in Western Australia’s Supreme Court, a US company sought to enforce by interlocutory injunction a restraint of trade against a former employee who had accepted employment with a rival in Western Australia.

The contract in which the restraint was included had been executed in Connecticut in the US and so the first question was whether it could be enforced in Western Australia. The answer was yes, but in the context of the case, an application for an injunction, the issue of the enforceability of the restraint clause (ie its validity) was a matter for a Western Australian judge to determine in accordance with Connecticut law.

Wow; how did the judge handle that? This how.

“Foreign law is a question of fact to be proved by expert evidence: Nielson v Overseas Projects Corporation of Victoria Ltd [2005] HCA 54; (2005) 223 CLR 331 [115] (Gummow & Hayne JJ) (Nielson). Expert evidence about foreign law can be divided into evidence about the content of the law and evidence about its application to the facts of a particular case. The former is said to be admissible; the latter is not. But a distinction between content and application evidence is not to be understood as precluding an expert from examining in evidence how a power or discretion would be exercised by a foreign court: Nielson [120].

The plaintiff adduced expert evidence of the law of Connecticut from Kevin Greene, an attorney who has been admitted to the Bar for the State of Connecticut since 1995. There is no challenge to his expertise nor to his opinion of the content of Connecticut law. However, both parties submitted that in so far as Mr Greene opines as to how Connecticut law would be applied to the facts of this case it is inadmissible….

To be enforceable the restrictive covenant must be supported by adequate consideration. Mr Greene says that under Connecticut law restrictive covenants entered into at the inception of employment are valid and supported by consideration. I find that the NonCompetition clause is supported by adequate consideration…..

The defendant has not established in relation to any of the five factors that the restraint is so clearly unreasonable that there is not a prima facie case that it is enforceable. Put another way, on the evidence before the Court there is a prima facie case that the NonCompetition restraint is enforceable. Of course, the court is merely considering whether or not the plaintiff has made out a prima facie case. Whether or not the restraint is, as a matter of fact and law, unenforceable is a matter to be determined at trial.”


The second question
was what law should be applied in determining whether an injunction should be applied to prevent a breach of the restraint. The answer was Western Australian law. This is how the judge put it;

“The principles governing the grant of an interlocutory injunction were set out by the High Court in Beecham Group Limited v Bristol Laboratories Pty Ltd [1968] HCA 1; (1968) 118 CLR 618and reaffirmed  in Australian Broadcasting Corporation v O’Neill [2006] HCA 46; (2006) 227 CLR 57. Before the court will exercise its discretion to award an interlocutory injunction, a plaintiff must satisfy the court that:

  • there is a prima facie case, in the sense that there is a serious question to be tried as to the plaintiff’s entitlement to relief, and a sufficient likelihood of success to justify the preservation of the status quo pending trial;
  • the plaintiff is likely to suffer injury for which damages will not be an adequate remedy; and
  • the balance of convenience favours the granting of an injunction.

The requisite strength of the probability of ultimate success depends upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought:Australian Broadcasting Corporation v O’Neill [71] [72] (Gummow & Hayne JJ).

The first of those matters, the reference to the nature of the rights asserted by the plaintiff, directs attention to the relief sought in this application an injunction to restrain a former employee from engaging in employment contrary to a contractual postemployment of noncompetition promise……..

Damages inadequate

I do not consider in this case that damages would be an adequate remedy for Naiad if the restraint clause were found at trial to be valid. An injunction to restrain a breach of a negative covenant is not usually declined on the grounds that damages are an adequate remedy. Reasons why damages are often inadequate include the difficulty of detecting breaches, the difficulty of establishing causation between a breach and any loss of business on the part of the plaintiff and the difficulty of calculating the quantum of loss.

In Emeco International Pty Ltd v O’Shea [2012] WASC 282 Edelman J said:

It has often been said, in the context of injunctive relief for apprehended breach of a restrictive covenant that ‘where what is involved is the enforcement by injunction of a contractual negative stipulation, it is a rare case in which relief will be declined on the basis that damages are a sufficient remedy’: Cerilian Pty Ltd v Graham Fraser [2008] NSWSC 1016 [10] (Brereton J); John Fairfax Publications Pty Ltd v Birt [2006] NSWSC 995 [45] (Brereton J); Willis Australia Group Services Pty Ltd v Griggs [2012] NSWSC 659 [129] – [130] (Ward J).

The reasons why damages are often inadequate in these cases includes (i) the difficulty of detection of breaches of the obligations; (ii) the difficulty of establishing causation between any loss of business with customers and any actions of the ex-employee; and (iii) the difficulty of the calculation of the quantum of any damage arising from loss of business:Huhtamaki Australia Ltd v Botha [2004] NSWSC 386 [17] (Hamilton J) [20] [21].

See also Ezeatm Ltd v Zani [2014] WASC 25 [17]; Sidameneo (No 456) Pty Ltd v Plint [2015] WASC 243 [60]; Habitat 1 Pty Ltd v Formby [2016] WASC 376 [79].

The relevant damage will largely relate to Naiad’s good will and customer connection. It may not be easy to identify transactions lost to Naiad due to Dr Vidakovic’s employment by Veem. The evidence before the Court is that such damage is not reasonably capable of precise quantification. Naiad would have to prove what profit Naiad lost by reason of Dr Vidakovic being employed by Veem. Such an analysis would require assumptions to be made which Naiad would have to prove as to what business Dr Vidakovic would have secured for Naiad which is not necessarily the same as the business he would gain for Veem and such matters are not easily proven. In those circumstances compensation for a breach of contract is an inferior remedy to prevention of the breach.”

And there, esteemed blog follower,  you have it.

 

Naiad Dynamics US Inc v Vidakovic (2017) WASC 109 per Le Miere J