Restraints of trade; validity, repudiation and affirmation

It is well settled that an employer cannot rely upon a post-employment restraint of trade even if it is prima facie enforceable if the employer has repudiated the contract of employment and the employee has accepted the repudiation an ended the contract by leaving the employer’s employment.

As a matter of ordinary contract law in the Australian common law, when one party to a contract is guilty of conduct which constitutes repudiation, the innocent or wronged party has a choice;

(a) to accept the repudiation and treat the contract as at an end and sue to recover damages (if any) or

(b)  to affirm the contract and claim damages for breach (if any).  A delay by the innocent party in making this election runs the risk of being treated as affirming the contract.

In Crowe Horwath  (Aust.) Pty Ltd v Loone  [2017] VSC 163 delivered 4 April 2017 per McDonald J, an employer sought an injunction against an employee who had left the employment after the employer failed to comply with what the court held were binding contractual obligations to pay bonuses. The employer relied upon a post employment restraint which the court found was on its face reasonable but the court held that the employee had been entitled to elect to accept the employer’s conduct as having brought the contract, and its on-going obligations and entitlements to an end, including its right to have the employee comply with the post-employment restraint of trade.

As to repudiation, the judge held that

“CHA’s refusal to comply with the mandatory criteria prescribed by cl 7.5 was such as to convey to a reasonable person in the position of Mr Loone renunciation by CHA of a fundamental obligation under the contract…….In Actrol Parts Pty Ltd v Coppi [No 2],[66] Bell J cited with approval the following statement by Judge LJ (Nourse and Tuckey LJJ agreeing) in Cantor Fitzgerald International v Callaghan:[67]

Where however an employer unilaterally reduces his employee’s pay, or diminishes the value of his salary package, the entire foundation of the contract of employment is undermined. Therefore an emphatic denial by the employer of his obligation to pay the agreed salary or wage, or a determined resolution not to comply with his contractual obligations in relation to pay and remuneration, will normally be regarded as repudiatory.[68]….

………………..Alternatively, the conduct was cumulative with the proposed changes to the remuneration model which are discussed below. Both these matters involved a breach of cl 7.5. In any event, as discussed below, I do not accept the judgment in Marks if it stands for the proposition that an employee can only rely upon cumulative repudiatory conduct as justifying termination where the conduct is identical…………………….“It does not follow, however, from the conclusion set out above that the changes that were introduced from late 2015 which diminished Mr Loone’s responsibilities are irrelevant to the question of whether CHA engaged in repudiatory conduct.

110 In John Lysaght (Australia) Ltd v Federated Iron Workers’ Association; Re York,[160] Sheppard J stated:

It is no doubt possible for the company to waive particular acts of misconduct that would otherwise have justified dismissal without notice. These particular acts could not subsequently be used for this purpose once the decision was made not to rely on them. The act of misconduct, however, does not then disappear and become irrelevant when further misconduct occurs. It remains and makes up the continuing history and record of a man’s service. That record may always be referred to for the purpose for which the company now points to it and the presence of incidence such as I have described will always be a relevant factor to be weighed in the balance by an employer when he comes to consider whether or not a further breach or other act or misconduct should not bring about a dismissal.[161]

111 The passage set out above was cited with approval by Osborn J in Connor v Grundy Television Pty Ltd.[162] His Honour stated:

In addition, a major breach or breaches of duty justifying dismissal which the employer elects to accept without dismissing the employee may still remain relevant as background to the assessment of the cumulative significance of subsequent less serious conduct.[163]

112 In Marks,[164] Mandie J stated:

In my opinion, it is well accepted that the prior affirmation of, or election to proceed with, an agreement by a party does not preclude that party from thereafter accepting a repeated repudiation which is identical to that which was previously not acted upon. A repeated repudiation will revive the other party’s right to rescind.[165]

The statement of Mandie J can be read as authority for the proposition that a repeated repudiation will only revive the other party’s right to rescind, relying upon earlier conduct which has been waived, where the subsequent conduct is identical to the earlier act of repudiation. I note that no subsequent case has considered or applied the above passage in Marks as authority for this proposition. If it is read in this way I consider that it states the principle too narrowly. The better view, articulated by Sheppard J in John Lysaght, cited with approval by Osborn J in Connor, does not require subsequent repudiatory conduct to be identical to that which has preceded it. CHA submitted, referring to John Lysaght:

It is important to distinguish between cases concerning summary dismissal and those cases concerning repudiatory conduct. In the context of summary dismissal cases previous misconduct that was waived by the employer can, under certain circumstances, be considered in determining whether the fresh misconduct is sufficient to warrant summary dismissal.[166]

I do not accept that there is any legitimate basis, as contended by CHA, for confining the reasoning in John Lysaght to cases where an employer, having waived reliance upon an employee’s previous acts of misconduct, relies upon such conduct, in determining whether fresh misconduct is sufficient to warrant summary dismissal. Whether the repudiatory conduct is engaged in by an employer or employee should make no difference to the application of legal principle governing the termination of a contract by acceptance of repudiatory conduct…………………In Richmond,[222] Blue J stated:

…the question whether the restraint clause survives [repudiation] must depend on the proper construction of the contract.[223]

Applying this approach, the question of construction in the present case is: do the restraints in sch 2 of the Contract survive the termination of the Contract in circumstances where Mr Loone accepted CHA’s repudiation of the Contract?

154 In Geraghty,[224] Gibbs J stated:

The answer to the appellants’ arguments that the respondents may be in default under the deed and yet enforce the restraint lies in the principles of equity. He who comes to equity must do equity, and parties who seek equitable relief by injunction to enforce a covenant in restraint of trade ‘cannot obtain such relief unless they allege and prove that they have performed their part of the bargain hitherto and are ready and able also to perform their part in the future’: Measures Brothers Ltd v Measures, cited in Kaufman v McGillicuddy.[225]

155 Applying Gibbs J’s reasoning to the present case, the restrictive covenants do not survive termination of the Contract brought about by Mr Loone’s acceptance of CHA’s repudiatory conduct. First, CHA did not comply with the mandatory criteria prescribed by cl 7.5. Second, the proposal to defer 20 per cent of the bonus payments for three years breached the requirement under cl 7.5 to pay in full the amount of any bonus determined by CHA. Putting to one side my findings regarding CHA’s repudiation by reason of the diminution in Mr Loone’s responsibilities as Managing Principal, CHA did not perform its part of the bargain under the Contract.

156 An alternative approach to the question of the enforceability of the restrictive covenants post-termination, underpinned by public policy considerations, was considered by Stephen J in Geraghty:

…The restraint clause is not only unilateral in the sense which I have indicated above: it is also so worded as to apply upon termination of the partnership for any reason, including termination (whether by the Minters or by the Geraghtys) under cl 17.

So say, the Geraghtys, the restraint clause might come into operation even although the partnership came to an end not merely through no fault of theirs but due to some positive fault of the Minters, perhaps even involving fraud. A restraint clause which, in conjunction with the rest of the deed, is capable of such an operation cannot be supported as a no more than reasonable restraint of trade. On the contrary, it is unconscionable and opposed to public policy.[226]

157 If the effect of cl 1.2(e) of sch 2 is that the restrictive covenants survive termination effected by Mr Loone’s acceptance of CHA’s repudiatory conduct, the clause could not be construed as doing no more than is reasonably necessary to protect the legitimate interests of CHA, either as to the duration of the clause or its extent.[227]

158 The question of reasonableness is not assessed by reference to the circumstances of the alleged breach, but rather by what the covenants require or permit the parties to the contract to do.[228] If, as contended by CHA, the effect of cl 1.2(e) is that post-employment restraints operate notwithstanding repudiation of the Contract by CHA, this would be so irrespective of the nature of CHA’s repudiatory conduct. Thus, the reasonableness of the restraints is determined by reference to the potential operation of the covenants irrespective of the nature of CHA’s repudiatory conduct. For example, if CHA falsely accused Mr Loone of misconduct and suspended him without pay, Mr Loone would be entitled to accept this repudiatory conduct as bringing the Contract to an end. Notwithstanding the nature of this repudiatory conduct, if CHA’s contention is accepted, the post-employment restraints would continue to operate. If cl 1.2(e) in conjunction with the restraints has this effect, the clauses are unenforceable as an unreasonable restraint of trade.

159 A further way of approaching the question of the enforceability of the restrictive covenants post-termination is to adopt the approach endorsed by Blue J in Richmond.[229] In considering whether the restraints in the service agreement would survive termination effected by acceptance of the Principal’s repudiation, Blue J considered whether continued operation would be inconsistent with the ‘substantive consideration’ for the restraint clause.[230] The substantive consideration for the restraint clauses in Mr Loone’s contract of employment was the agreement to pay remuneration in accordance with cl 7. Mr Loone’s entitlement to have his bonus assessed in accordance with the prescribed criteria in cl 7.5 and to have the full amount so determined paid to him formed part of the substantive consideration for the post-employment restraints. Properly construed, the parties’ intention as manifested in the contract is that the post-employment restraints would not operate where the termination arose out of Mr Loone’s acceptance of CHA’s repudiatory conduct where such conduct constituted a failure by CHA to comply with the prescribed criteria which underpinned the assessment and payment of Mr Loone’s bonus.

160 If, contrary to the conclusion set out above, the post-employment restraints survive Mr Loone’s acceptance of CHA’s repudiatory conduct, I would in any event refuse on discretionary grounds to grant an injunction to enforce the restraints.

161 No authority has been drawn to my attention, and my own research has not disclosed any case, where a court, having found that an employer has engaged in repudiatory conduct, has declined to grant injunctive relief on discretionary grounds. It would appear the issue has simply not arisen because there has not been a case in which a court has concluded that a post-employment restraint has survived termination of the contract by an employee’s acceptance of the employer’s repudiation.

162 In the absence of any authority directly on point, the reasoning of Gibbs J in Geraghty,[231] referred to above, is apposite:

He who comes to equity must do equity, and parties who seek equitable relief by injunction to enforce a covenant in restraint of trade ‘cannot obtain such relief unless they allege and prove that they have performed their part of the bargain hitherto and are ready and able also to perform their part in the future’.[232]

163 CHA failed to assess Mr Loone’s bonus entitlement in accordance with the mandatory criteria prescribed by cl 7.5. The new incentive plan which was to be introduced for the 2017 financial year breached cl 7.5 insofar as it provided for the deferral of 20 per cent of Mr Loone’s bonus entitlement for a period of three years. Notwithstanding its discretionary character, Mr Loone’s right to have a bonus entitlement determined in accordance with the prescribed performance criteria and to have the bonus paid in full constituted an important element of the consideration which underpins the restraints of the Contract. It would be unfair if CHA was to receive the benefit of the restraints notwithstanding its failure to comply with significant contractual obligations…

As to affirmation, the judge held

Alternatively, the conduct was cumulative with the proposed changes to the remuneration model which are discussed below. Both these matters involved a breach of cl 7.5. In any event, as discussed below, I do not accept the judgment in Marks if it stands for the proposition that an employee can only rely upon cumulative repudiatory conduct as justifying termination where the conduct is identical…… I do not consider that by reason of this delay Mr Loone affirmed the Contract and was thereby precluded from accepting CHA’s conduct as bringing the Contract to an end on 12 July 2016.

64 1 July 2016 was a Friday. On 4 July 2016, Mr Loone commenced one week of annual leave, returning to work on 11 July. In Western Excavating (ECC) Ltd v Sharp,[87] Lord Denning MR stated:

If the employer is guilty of conduct which is a significant breach going to the root of the contract of employment; or which shows that the employer no longer intends to be bound by one or more of the essential terms of the contract; then the employee is entitled to treat himself as discharged from any further performance. If he does so, then he terminates the contract by reason of the employer’s conduct. He is constructively dismissed. The employee is entitled in those circumstances to leave at the instant without giving any notice at all or, alternatively, he may give notice and say he is leaving at the end of the notice. But the conduct must in either case be sufficiently serious to entitle him to leave at once. Moreover, he must make up his mind soon after the conduct of which he complains: for, if he continues for any length of time without leaving, he will lose his right to treat himself as discharged. He will be regarded as having elected to affirm the contract.[88]

65 A question arises, based on the reasoning of Denning MR, whether, by reason of the delay of 11 days between 1 July and 12 July 2016, Mr Loone should be taken to have affirmed the Contract. Notwithstanding the reasoning of Denning MR in the above passage, subsequent authorities suggest that mere delay in accepting repudiation of a contract of employment does not amount to affirmation where the employee makes his or her objection to the repudiatory conduct clear.

66 In WE Cox Toner Ltd v Crook,[89] Browne-Wilkinson J considered the passage from Sharp set out above. His Honour noted the difficult position of an employee faced with repudiation by an employer: by continuing to work for any period of time, the employee risks affirming the contract. His Honour stated:

If one party (‘the guilty party’) commits a repudiatory breach of the contract, the other party (‘the innocent party’) can choose one of two courses: he can affirm the contract and insist on its further performance or he can accept the repudiation, in which case the contract is at an end. The innocent party must at some stage elect between these two possible causes: if he once affirms the contract, his right to accept the repudiation is at an end. But he is not bound to elect within a reasonable or any other time. Mere delay by itself (unaccompanied by any express or implied affirmation of a contract) does not constitute affirmation of the contract; but if it is prolonged it may be evidence of an implied affirmation: Allen v Robles [1969] 1 WLR 1193. Affirmation of the contract can be implied. Thus, if the innnocent party calls on the guilty party for further performance of the contract, he will normally be taken to have affirmed the contract since his conduct is only consistent with the continued existence of the contractual obligation. Moreover, if the innocent party himself does acts which are only consistent with the continued existence of the contract, such acts will normally show affirmation of the contract. However, if the innocent party further performs the contract to a limited extent but at the same time makes it clear that he is reserving his rights to accept the repudiation or is only continuing so as to allow the guilty party to remedy the breach, such further performance does not prejudice his right subsequently to accept the repudiation: Farnworth Finance Facilities Ltd v Attryde [1970] 1 WLR 1053.

It is against this background that one has to read the short summary of the law given by Lord Denning MR in the Western Excavating case [1977] EWCA Civ 2; [1978] ICR 221. The passage, at page 226:

Moreover, he must make up his mind soon after the conduct of which he complains: for, if he continues for any length of time without leaving, he will lose his right to treat himself as discharged.

is not, and was not intended to be, a comprehensive statement of the whole law. As it seems to us Lord Denning MR was referring to an obvious difference between a contract of employment and most other contracts. An employee faced with a repudiation by his employer is in a very difficult position. If he goes to work the next day, he will himself be doing an act which, in one sense, is only consistent with the continued existence of the contract, ie he might be said to be affirming the contract. Certainly, when he accepts his pay packet (ie further performance of the contract by the guilty party) the risk of being held to affirm the contract is very great: See Saunders v Paladin Coachworks Ltd (1967) 3 ITR 51. Therefore, if the ordinary principles of contract law were to apply to a contract of employment, delay might be very serious, not in its own right but because any delay normally involves further performance of the contract by both parties. It is not the delay which may be fatal but what happens during the period of the delay: See Bashir v Brillo Manufacturing Co [1979] IRLR 295.

Although we were not referred to the case, we think the remarks of Lord Denning MR in the Western Excavating case are a reflection of the earlier decision of the Court of Appeal in Marriott v Oxford and District Co-operative Society Ltd (No 2) [1970] 1 QB 186. In that case, the lawyer repudiated the contract by seeking to change the status of the employee and to reduce his wages. The employee protested at this conduct but continued to work and receive payment at the reduced rate of pay for a further month, during which he was looking for other employment. The Court of Appeal (of which Lord Denning MR was a member) held that he had not thereby lost his right to claim that he was dismissed. In the Western Excavating case Lord Denning MR explains, at page 227, that the case would now be treated as one of constructive dismissal. This decision to our mind establishes that, provided the employee makes clear his objection to what is being done, he is not to be taken to have affirmed the contract by continuing to work and draw pay for a limited period of time, even if his purpose is merely to enable him to find another job.[90]

67 In Crook, the employee was held to have affirmed the contract of employment. In that case, a period of seven months had elapsed between the employer’s repudiatory conduct and the employee’s purported acceptance of the repudiation. Browne-Wilkinson J noted that there must be some limit to the amount of time an employee can continue to work and draw a salary from his or her employer before he or she will be taken to have affirmed the contract.[91] However, his Honour held that it was unnecessary to reach a conclusion on whether seven months’ delay surpassed this threshold. His Honour instead concluded that the employee had affirmed the contract on the basis that he had issued an ultimatum to his employer six months after the repudiatory conduct yet had remained in employment for one month after his employer had refused to comply with this ultimatum.[92] Importantly, Browne-Wilkinson J concluded that the tribunal below had erred in considering delay to be the only relevant consideration as to whether there had been an affirmation of the contract.[93]

68 Crook was cited with approval by Hodgson CJ in Harris/D-E Pty Ltd v McClelland’s Coffee & Tea Pty Ltd.[94] His Honour also cited with approval Bashir v Brillo Manufacturing Co,[95] another English authority in which an employee was held not to have affirmed an employer’s repudiatory conduct by reason of a delay in bringing the contract to an end. In Bashir, an employee alleged repudiation by an employer in that the employer refused to allow him to continue as a supervisor and instead offered him a job with less pay and lower status. The employee was away sick for about two and a half months after this act of the employer and accepted sick pay during that period. However, throughout the period the employee or his advisers were saying very positively that the employee did not accept the new position which the employer had sought to offer him, and the sick pay collected was at the same rate as he was entitled to as a supervisor. In those circumstances, the Employment Appeal Tribunal found that the employee had not affirmed the variation in the contract of employment, and was still entitled to accept the employer’s repudiation at the end of the two and a half month period.

69 The principle that mere delay does not necessarily constitute affirmation of a contract of employment is in line with the principles governing affirmation of contracts in general. In Sargent v ASL Developments Ltd,[96] Mason J stated:

A person confronted with a choice between the exercise of alternative and inconsistent rights is not bound to elect at once. He may keep the question open, so long as he does not affirm the contract or continuance of the estate and so long as the delay does not cause prejudice to the other side. An election takes place when the conduct of the party is such that it would be justifiable only if an election had been made one way or the other… So, words or conduct which do not constitute the exercise of a right conferred by or under a contract and merely involve a recognition of the contract may not amount to an election to affirm the contract.[97]

70 In Harpham v Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing & Allied Services Union of Australia,[98] Tracey J stated:

It may be accepted that the CEPU repudiated Mr Harpham’s contract of employment when it substantially reduced his remuneration package in 2009: see Cantor Fitzgerald International v Callaghan [1999] EWCA Civ 622; [1999] 2 All ER 411 at 420-1. Moreover, after 1 July 2009, the CEPU breached Mr Harpham’s employment contract by paying him less than the sum that had been contractually agreed in September 2008.

The CEPU, dealing evidently with the eventuality that its breach was repudiatory, submitted that Mr Harpham ‘elected to continue in employment’. I would accept that submission. At the point of repudiatory breach, Mr Harpham could have elected to terminate the contract: see Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] FCAFC 177; (2014) 231 FCR 403 at 435-6. He did not, however, do so. He chose to remain in his position as an organiser for over three years. During this period further variations to his remuneration occurred and were not objected to by him. While an immediate decision was not required on 1 July 2009 (cf Rigby v Ferodo Ltd [1988] ICR 29) his protracted on-going employment was consistent only with his having elected to affirm the contract: cf Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 656; Khoury v Government Insurance Office of New South Wales [1984] HCA 55; (1984) 165 CLR 622 at 633; and Galafassi v Kelly [2014] NSWCA 190; (2014) 87 NSWLR 119at [88].[99]

71 Consistent with the authorities referred to above, the fact that Mr Loone continued to receive a salary during the period from 1 July until 12 July 2016 does not necessitate a conclusion that he thereby affirmed the Contract. Mr Loone made very clear during his discussion with Mr Roberts on 1 July that he considered the position which CHA was taking in relation to the calculation of the Launceston bonus pool to be very unfair. Further, the previous day, he had told both Michael Wilkins and Bruce Roberts that he would be reassessing his position.[100] His evidence was that he was ‘basically threatening to resign’.[101]

72 In each case it is a question of fact as to whether the conduct of an employee constitutes an affirmation of his or her contract. In the present case, the conduct of Mr Loone between 1 July and 12 July 2016 did not constitute an affirmation of the Contract. He was entitled to rely upon CHA’s stated intention to exclude the DFG acquisition from the Launceston bonus pool as grounds for terminating the Contract on 12 July 2016.”

 

 

……………….

Conclusion…………………………….

166 The restrictive covenants in cl 3.1 of sch 2 of the Contract do not survive the termination of the Contract effected by Mr Loone’s acceptance of CHA’s repudiatory conduct. Mr Loone’s is entitled to an order discharging the injunction granted on 26 September 2016.[235] When the injunction was granted, CHA gave an undertaking to abide by any order the Court may make as to damages if the Court concludes that Mr Loone has sustained damage by reason of the injunction, which CHA ought to pay.

167 By an amended counterclaim dated 23 December 2016, Mr Loone has claimed damages. His particulars of damage include the following:

Mr Loone has lost the right to receive the remuneration he would have received had he remained employed with CHA into the foreseeable future and received his full remuneration and STI, properly calculated to include the increase in the net profit growth derived from acquisition of the Davey Financial Group and the integration of that firm into Crowe Horwath Launceston.[236]

168 Pursuant to cl 16.2 of the Contract, both he and CHA had the right to lawfully terminate the Contract upon the provision of six months’ notice.[237] To the extent that Mr Loone seeks damages flowing from the Court’s finding that CHA repudiated the Contract, a question arises as to whether any entitlement to damages is limited by the right of either party to terminate the Contract upon six months’ notice.[238]

169 The injunction granted by the Court on 26 September 2016 restricted Mr Loone from providing accounting services to 89 clients of CHA.[239] If any entitlement to damages is asserted on the basis of Mr Loone having continued in employment, a further question arises as to what damages flow from the injunction granted on 26 September 2016. If Mr Loone claims damages based upon his entitlement to have continued in employment with CHA, it is not readily apparent how he can simultaneously claim damages flowing from the injunction. The restraints arising from the injunction only had work to do because Mr Loone was no longer an employee of CHA.”

http://www.austlii.edu.au/au/cases/vic/VSC/2017/163.html