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WA Flick & Co Pty Ltd v RW Thompson [1976] PGNC 59; [1976] PNGLR 112 (8 April 1976)

Papua New Guinea Law Reports - 1976

[1976] PNGLR 112 - WA Flick & Co Pty Ltd v RW Thompson�

[1976] PNGLR 112

N43

PAPUA NEW GUINEA

[NATIONAL COURT OF JUSTICE]

WA FLICK & CO PTY LTD

V

RW THOMPSON

Waigani

Saldanha J

5-7 November 1975

8 April 1976

TRADE AND COMMERCE - Restraint of trade by agreement - Validity and reasonableness - Contract between employer and employee - Restraint on setting up business on own account or entering service of rival trader - Restraint for 3 years within 5 mile radius of Port Moresby and Kieta - Pest control business - Restraint not too wide re time and space - Restraint not wider than necessary to protect employer�s interests - Measure of damages.

DAMAGES - Breach of contract - Contract in restraint of trade - Contract between employer and employee - Measure of damages - Restitutio in integrum.

The plaintiff W. A. Flick & Co. Pty. Ltd., a company engaged in pest control operations throughout Australia and with a branch office at Port Moresby, employed the defendant under a written agreement as a pest control operator from February, 1970, to December, 1972 in New South Wales and thereafter until the defendant terminated his employment in February, 1974 at Port Moresby and Kieta.

In July, 1974 the defendant set up business on his own account in the name of South Pacific Pest Control, which he conducted in Port Moresby and other places. The contract of employment between the plaintiff and the defendant contained a restraint of trade clause in the following terms:

N2>�7.����� The Employee hereby expressly covenants and agrees with the Company its successors and assigns that he will not for a period of three years after the termination of his employment with the Company within five miles of any place where he has been employed by or has done work in the course of his employment with the Company in connection with, either directly or indirectly, the destruction or control of white ants, borers or other pests either by himself or with or on behalf of any other person open commence or carry an or accept employment in or interest himself in or perform any work pertaining to any business of making or selling or otherwise marketing or disposing of any preparation mixture or composition for the destruction or control of white ants, borers or pests or of carrying out the treatment of any buildings premises or structures for the purpose of destroying or controlling white ants borers or other pests.�

On 3rd September, 1974, the plaintiff issued a writ of summons against the defendant, claiming damages for breach of contract.

Held

N1>(1)����� In contracts where an employee agrees that he will not compete against his employer either by setting up business on his own account or by entering the service of a rival trader, every restraint whether general or partial is contrary to public policy and is prima facie void, but valid if reasonable. Nordenfelt v. Maxim Nordenfelt Gun and Ammunition Co. Ltd. [1891-4] All E.R. 1 at p. 18 followed; Petrofina Ltd. v. Martin, [1966] 1 All E.R. 126 at p. 131, and Mason v. Provident Clothing and Supply Company, Limited, [1913] UKLawRpAC 37; [1913] A.C. 724; [1911-13] All E.R. 400 referred to.

N1>(2)����� The question of reasonableness of the restraint is to be determined at the date of the agreement, making the best possible estimate of the probabilities and contingencies.

Linder v. Murdock�s Garage [1950] HCA 48; (1950) 83 C.L.R. 628 at p. 633 followed.

N1>(3)����� The restraint must be reasonable in the interests of both contracting parties and also in the interests of the public, and this will be determined by a consideration of the nature and extent of the trade and of the servant�s employment therein, and the two factors of time and space. Herbert Morris, Limited, v. Saxelby, [1916] 1 A.C. 688 at pp. 707, 709; [1916-17] All E.R. 305 at pp. 305, 317; and Badische Anilin Und Soda Fabrik v. Schott Segner & Co.[1892] UKLawRpCh 129; , [1892] 3 Ch. 447 at p. 451 followed.

N1>(4)����� The onus of proving reasonableness between the parties lies upon the covenantee (Mason v. Provident Clothing and Supply Company, Limited, [1913] UKLawRpAC 37; [1913] A.C. 724 at p. 733; [1913] UKLawRpAC 37; [1911-13] All E.R. 400), and the onus of proving that the contract tends to injure the public rests with the covenantor. (Attorney-General v. Adelaide Steamship Co. Ltd.[1913] UKLawRpAC 36; , [1913] A.C. 781 at p. 796; [1913] ArgusLawRp 89; [1911-13] All E.R. 1120; (1913) 18 C.L.R. 30 at p. 35).

N1>(5)����� The restraint imposed by cl. 7 of the agreement between the plaintiff and the defendant, was not unreasonable regarding space and time, was no wider than was necessary to protect the plaintiff�s business connection, was not aimed solely at preventing competition and was therefore valid.

N1>(6)����� By setting up business on his own account in Port Moresby and working at Kieta the defendant had committed a breach of contract for which he was liable in damages to the plaintiff.

N1>(7)����� The measure of damages based upon the principle of restitutio in integrum, is that the plaintiff must be compensated, as far as money can, for any loss, which is not too remote, suffered by him as a result of the defendant�s breach of contract.

N1>(8)����� Accordingly, there being no one else doing the same business in the areas involved or at the time involved damages should be assessed at K7,500 calculated by taking what would have been the plaintiff�s gross returns for the same business, over the same period, deducting therefrom approximately 27� per cent for additional expenses for e.g. chemicals that would have been incurred by the plaintiff, deducting therefrom approximately 33� per cent for tax and deducting therefrom K.250 in respect of the possibility that some customers might have had work done only because of the defendant�s lower prices.

Action

This was an action in which the plaintiff company claimed damages against the defendant (a former employee) for breach of a contract of employment, containing a �restraint of trade� clause, which the defendant maintained was invalid, as being in restraint of trade, and the restraints being wider than were reasonably necessary for the protection of the interests of the plaintiff.

Counsel

JA Griffin for the plaintiff

MJ Wright for the defendant

Cur. adv. vult.

8 April 1976

SALDANHA J:� The plaintiff, W. A. Flick & Co. Pty. Ltd., is an incorporated company registered in Papua New Guinea. It is an Australian company engaged in pest control operations throughout Australia with a branch office at Port Moresby.

The defendant, Raymond William Thompson, was employed by the plaintiff as a pest control operator. He first entered the service of the plaintiff by an agreement in writing dated 2nd February, 1970. He was then living at Chatswood in New South Wales, Australia, some seven miles from Sydney. He was next transferred to Orange in New South Wales where he worked for about ten months, and from there to Campbelltown where he stayed for three to four weeks followed by a few weeks at Chatswood.

He was transferred to the branch office at Port Moresby as Branch Manager and he arrived in Papua New Guinea on 2nd December, 1972.

He left his employment with the plaintiff in February 1974, presumably after giving one week�s notice as provided for by the agreement.

On 1st July, 1974 he set up business on his own account in the name of South Pacific Pest Control and employed as an assistant Alexander McCreath who had been employed as a manager by Port Moresby Pest Control.

It is not disputed that the defendant carried on the same kind of business that the plaintiff was doing except that certain types of operations were beyond his capacity for lack of capital and equipment. Nor is it disputed that most of the companies and concerns that he worked for had formerly been served by the plaintiff. In addition he did some work for private residences.

On 3rd September, 1974, the plaintiff issued a writ of summons against the defendant, claiming damages for breach of contract. The plaintiff contends that by setting up in the business of pest control the defendant committed a breach of cl. 7 of the agreement. This clause provides as follows:

N2>�7.����� The Employee hereby expressly covenants and agrees with the Company its successors and assigns that he will not for a period of three years after the termination of his employment with the Company within five miles of any place where he has been employed by or has done any work in the course of his employment with the Company in connection with, either directly or indirectly, the destruction or control of white ants, borers or other pests either by himself or with or on behalf of any other person open commence or carry on or accept employment in or interest himself in or perform any work pertaining to any business of making or selling or otherwise marketing or disposing of any preparation mixture or composition for the destruction or control of white ants borers or pests or of carrying out the treatment of any buildings premises or structures for the purpose of destroying or controlling white ants borers or other pests.�

The defendant however maintains that cl. 7 of the agreement is invalid as being in restraint of trade, that the restraints regarding the area within which and the period during which the defendant is precluded from carrying on the business of pest control is wider than is reasonably necessary for the protection of the interests of the plaintiff.

The law regarding contracts in restraint of trade is briefly as follows. A contract in restraint of trade is defined by Lord Denning M.R. in the following passage from Petrofina, Ltd. v. Martin[cxxxix]¹:

�In the result I take the general principle to be this � every member of the community is entitled to carry on any trade or business that he chooses and in such manner as he thinks most desirable in his own interests, so long as he does nothing unlawful; with the consequence that any contract which interferes with the free exercise of his trade or business, by restricting him in the work he may do for others, or the arrangements which he may make with others, is a contract in restraint of trade.�

One such contract is where an employee agrees that he will not compete against his employer either by setting up business on his own account or by entering the service of a rival trader. There are others but it is this type of contract which concerns us in the instant case. Every restraint whether general or partial is contrary to public policy and is prima facie void but valid if reasonable. This proposition was stated by Lord Macnaghten in Nordenfelt v. Maxim Nordenfelt Gun and Ammunition Co., Ltd.[cxl]²�as follows:

�All interferences with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and, therefore, void. That is the general rule. But there are exceptions. Restraints of trade ... may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed, it is the only justification, if the restriction is reasonable � reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.�

And later, at p. 23:

�... I think the only true test in all cases, whether of partial or general restraint, is the test proposed by Tindal C.J.: What is a reasonable restraint with reference to the particular case?�

In Mason v. Provident Clothing and Supply Company, Limited[cxli]³�the House of Lords held that Lord Macnaghten had correctly stated the law. The question of the reasonableness of the restraint is to be determined as at the date of the agreement, making the best possible estimate of the probabilities and contingencies. (Linder v. Murdock�s Garage[cxlii]⁴).

The restraint must be reasonable in the interests of both contracting parties and also in the interests of the public (Herbert Morris, Limited v. Saxelby[cxliii]⁵).

The onus of proving reasonableness between the parties lies upon the covenantee, (Mason v. Provident Clothing and Supply Company, Limited[cxliv]⁶) but the onus of proving that the contract tends to injure the public rests with the covenantor � Attorney-General v. Adelaide Steamship Co. Ltd.[cxlv]⁷.

Lindley M.R. observed in E. Underwood & Son, Limited v. Barker[cxlvi]⁸�that it is difficult to imagine circumstances which can render a covenant injurious to the public if it is reasonable between the parties. The restraint must be no wider than is reasonably necessary to protect the covenantee�s interest, (E. Underwood & Son, Limited v. Barker[cxlvii]⁹, Herbert Morris, Limited v. Saxelby[cxlviii]¹⁰; Butt v. Long[cxlix]¹¹). The onus of establishing this lies on the covenantee, Buckley v. Tutty[cl]¹².

The following passage from Law of Contract Cheshire and Fifoot, 3rd Australian edition, p. 431, sets out the circumstances under which a master may impose restraints to protect his customers from being exploited by his servant:

�An employer is also entitled to protect his trade connexion, i.e., to prevent his customers from being enticed away from him by a servant who was formerly in his employ. Protection is required against the unfair invasion of his connexion by a servant who has had special opportunities of becoming acquainted with his clientele, especially recurring customers, (Scorer v. Seymour-Johns, [1966] 3 All E.R. 347) and if the protection is no more than adequate for this purpose, it is permitted by the law. (Dewes v. Fitch, [1920] 2 Ch. 159 at pp. 181-2 per Warrington L.J.).�

And further, at p. 432:

�A restraint is not valid unless the nature of the employment is such that customers will either learn to rely upon the skill or judgment of the servant or will deal with him directly and personally to the virtual exclusion of the master, with the result that he will probably gain their custom if he sets up business on his own account.�

In Herbert Morris, Limited v. Saxelby[cli]¹³�Lord Parker stressed that before any restraint is justifiable the servant must be one who will acquire not merely knowledge of customers, but in addition influence over them.

In deciding the question of reasonableness of restraint the Court must consider the nature and extent of the trade and of the servant�s employment therein and pay special attention to the two factors of time and space. Badische Anilin Und Soda Fabrik v. Schott, Segner & Co.[clii]¹⁴�per Chitty J.

The master is not entitled to guard himself against the possibility that a servant may be a competitor in the future. A restraint against competition per se is void. Leather Cloth Company v. Lorsont[cliii]¹⁵; Minnesota Mining & Manufacturing (Australia) Pty. Limited v. Richards[cliv]¹⁶.

In Herbert Morris, Limited v. Saxelby[clv]¹⁷, the House of Lords held that a covenant which restrains competition is void as being unreasonable unless the master has an interest which requires protection.

I now examine the evidence in the light of the principles set out above. Clause 7 prevents the defendant from setting up business on his own account or joining a rival concern in certain areas and for a certain length of time. It is undoubtedly a clause in restraint of trade. The necessity for including such a clause in the contract is obvious. As a pest control operator the defendant would come into contact with the plaintiff�s clients and acquire influence over them. When working in the office he would be in touch with the clients on the telephone and when working in the field he would come into contact with them personally. The big companies and concerns would be recurring clients. They would come to rely on the defendant�s skill and experience, and, if after he ceased working for the plaintiff he worked in the same place or places where he worked before, either for himself or someone else, there is every likelihood that the plaintiff�s clients would follow him.

In determining the reasonableness or otherwise of the restraints one must consider the circumstances prevailing at the time when the contract was made. The contract was made in Australia where the plaintiff company is in business in a big way having branches and agencies throughout the country. The defendant having worked in this business in Australia admits that in the bigger towns most of the plaintiff�s work would be done within a radius of about five miles from the branch office. He admits that in Port Moresby both when he worked for the plaintiff company as well as when he worked for himself most of the work done was within a radius of five miles from the plaintiff�s office. According to the terms of the contract apart from Chatswood, Orange and Campbelltown in Australia, and Port Moresby and Kieta (Panguna) in Papua New Guinea, there is nothing to prevent the defendant from working anywhere else. In these circumstances the restraint regarding the area of operation does not appear to me to be unreasonable. Nor is it unreasonable regarding time. In my view three years is not an unreasonably long time to allow to enable the plaintiff�s clients to forget whatever influence the defendant may have acquired over them.

One thing is clear. Clause 7 is certainly not designed to protect the plaintiff from the defendant�s competition per se. Apart from the three places in Australia and the two places in Papua New Guinea the defendant is free to work anywhere. He could if he wished set up business on his own account next door to the plaintiff and in open competition with him. There is nothing to prevent him from working for a rival concern such as Rentokil in Australia which has a business as extensive as that of the plaintiff.

Counsel for the defendant maintains that to enforce the covenant in restraint of trade would be against public policy inasmuch as it would tend to perpetuate the monopolistic position which the plaintiff company enjoys in Port Moresby. The plaintiff company, however, does not enjoy a monopoly in Australia where the defendant is free to work at his calling except for the three places mentioned above. In 1970 when the parties entered into contract I doubt whether they ever imagined that the defendant would be transferred to Port Moresby. There is no reason why five years later there should not have been a half dozen or so more companies engaged in the business of pest control. The fact that there is only one, namely the plaintiff, is purely fortuitous.

In short, the restraint imposed by cl. 7 of the agreement is not unreasonable regarding space and time, it is no wider than is necessary to protect the plaintiff�s business connection, it is not aimed solely at preventing competition and therefore it is not void. By setting up business on his own account in Port Moresby and working for Bougainville Copper at Kieta the defendant has done the very thing he agreed not to do and has therefore committed a breach of contract for which he is liable in damages to the plaintiff.

The principle upon which the question of measure of damages is based is restitutio in integrum. It is stated succinctly in Law of Contract Cheshire and Fifoot, 3rd Australian edition, at p. 720, as follows:

�... the plaintiff must be compensated, as far as money can, for any loss, which is not too remote, suffered by him as a result of the defendant�s breach of the contract.�

It is agreed that the defendant�s gross returns from the date of his setting up business, viz., 1st July 1974 to 31st October 1975, is K12,600. This work would have been done by the plaintiff company if the defendant was not in the same business. There was no one else doing the work of pest control.

According to the evidence of Kenneth Edward Burmeister, the Regional Manager for Papua New Guinea, the defendant�s charges were 20% to 25% lower than those of the plaintiff. Assuming in favour of the defendant that they were only 20% lower the plaintiff company would have charged K2,520 more, but taking the lower figure of K2,400 mentioned by Mr. Griffin the plaintiff company�s charges for the same work would have been K12,600 + K2,400 = K15,000.

I make a deduction of 27�% for additional expenses that would have been incurred by the company. These figures were given by Mr. Burmeister and are as follows:

27 1/2% of K15,000 is K3,375. But again taking in favour of the defendant the higher figure of K4,000 mentioned by Mr. Griffin we get a figure of K11,000, which is what the plaintiff company would have earned after deduction of expenses.

Tax at 33 1/3% amounts to K3,666. I take the higher figure of K3,750 mentioned by Mr. Griffin in favour of defendant and deducting this from K11,000 arrive at a figure of K7,250. It is possible that some customers may have engaged the defendant because his charges were lower, otherwise they would not have got the work done at all. I deduct K250 in respect of this contingency and arrive at the round figure of K7,000, which is the amount which the defendant must pay the plaintiff by way of damages.

Judgment for plaintiff for K7,000.

Solicitors for the plaintiff: McCubbery Train Love and Thomas.

Solicitors for the defendant: Craig Kirke & Wright.

[cxxxix] [1966] 1 All E.R. 126 at p. 131.

[cxl] [1891-4] All E.R. 1 at p. 18.

[cxli][1913] A.C. 724; [1911-13] All E.R. 400.

[cxlii][1950] HCA 48; (1950) 83 C.L.R. 628 at p. 633.

[cxliii] [1916] 1 A.C. 688 at p. 707; [1916-17] All E.R. 305 at p. 317.

[cxliv][1913] UKLawRpAC 37; [1913] A.C. 724 at p. 733; [1911-13] All E.R. 400.

[cxlv][1913] UKLawRpAC 36; [1913] A.C. 781 at p. 796; [1913] ArgusLawRp 89; [1911-13] All E.R. 1120; 18 C.L.R. 30 at p. 35.

[cxlvi][1899] UKLawRpCh 16; [1899] 1 Ch. 300 at p. 305.

[cxlvii][1899] UKLawRpCh 16; [1899] 1 Ch. 300 at p. 305.

[cxlviii] [1916] 1 A.C. 688 at p. 706; [1916-17] All E.R. 305.

[cxlix][1953] HCA 76; (1953) 88 C.L.R. 476 at p. 486.

[cl][1971] HCA 71; [1972] A.L.R. 370 at 380.

[cli] [1916] 1 A.C. 688 at p. 709; [1916-17] All E.R. 305.

[clii][1892] UKLawRpCh 129; [1892] 3 Ch. 447 at p. 451.

[cliii](1869) L.R., IX Eq. 345 at p. 354.

[cliv] (1963) N.S.W.R. 1613 at p. 1621.

[clv] [1916] 1 A.C. 688 at p. 706.