Capital Aircraft Services Pty Ltd v Brolin [2006] ACTSC 80 (17 August 2006)

Last Updated: 13 February 2007

CAPITAL AIRCRAFT SERVICES PTY LTD v NICHOLAS CARL BROLIN

[2006] ACTSC 80 (17 August 2006)

CONTRACT - restraint of trade - prohibition on part-time contractor performing any other contract services for competitors.

PRACTICE AND PROCEDURE - determination of question of law - question arises at close of plaintiff's case - Court Procedures Rules, r 1521.

Court Procedures Rules 2006, r 1521

Herbert Morris Ltd v Saxelby [1916] AC 688

Nordenfelt Guns and Ammunition Co v Nordenfelt [1894] AC 535

Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126

Hivac Ltd v Park Royal Scientific Instruments [1946] Ch 169

Weldon & Co v Harbison [2000] NSWSC 272

Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1967] UKHL 1; [1968] AC 269

Australian Capital Territory v Munday [2000] FCA 653; (2000) 99 FCR 72

Macken, O'Grady, Sappideen & Warburton, The Law of Employment (5^th ed 2002) Lawbook Co

JD Heydon in The Restraint of Trade Doctrine (2^nd ed 1999)

A Brooks, The Limits of Competition: Restraint of Trade in the Context of Employment Contracts [2001] UNSWLJ 346

No SC 516 of 2003

Judge: Connolly J

Supreme Court of the ACT

Date: 17 August 2006IN THE SUPREME COURT OF THE )

) No. SC 516 of 2003

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: CAPITAL AIRCRAFT SERVICES PTY LTD ACN 002 140 267

Plaintiff

AND: NICHOLAS CARL BROLIN

Defendant

ORDER

Judge: Connolly J

Date: 17 August 2006

Place: Canberra

THE COURT ORDERS THAT:

1. The answer to the question "Whether clause 3 of the contract of employment as asserted by the plaintiff is void and of no effect on the grounds that it is contrary to public policy?" is "Yes".

2. The plaintiff's claim for relief be dismissed.

3. There be liberty to hear the parties for consequential orders and costs.

1. This is an application for an order on a question of law arising during the course of the hearing of an action for damages for breach of contract in an employment situation. The plaintiff sues the defendant for a claimed breach of contract in which the plaintiff says the defendant agreed to exclusively provide his services as a part time aircraft maintenance engineer to the plaintiff. The plaintiff says that, in breach of this agreement, the defendant undertook duties for another aircraft operator.

2. The matter is defended and there is a significant factual dispute between the parties as to whether or not the defendant knew of the exclusivity clause, which it is common ground was inserted in a late draft of the agreement, when he signed the contract. Mistake is pleaded as a defence, and there is also a counterclaim going to what is said to be unpaid amounts for work performed by the defendant. In his defence, the defendant also pleads that the claimed exclusivity clause in the contract is void as an unlawful restraint of trade.

3. The matter was originally listed for hearing in December 1995, but after the first day of evidence it emerged that counsel for the defendant could no longer continue in the matter, and the matter was adjourned. It was relisted on 31 July 2006, and the plaintiff completed his evidence, tendered all exhibits, and formally closed his case. At this point, counsel for the defendant made an application, pursuant to r 1521 of the Court Procedures Rules 2006 for the separate determination of a question of law, namely, "whether clause 3 of the contract of employment as asserted by the plaintiff is void and of no effect on the grounds that it is contrary to public policy".

4. Rule 1521 (1) provides that:

The court may make an order for the decision by the court of a question separately from another question, whether before, at, or after the trial or continuation of the trial of the proceeding.

This is a new rule, although reference is given to the old O 37 rules 1-3 which permitted a court to set down a preliminary question of law. It is clear from the wording of r 1521 that it is intended to amend the old procedure, in that it permits the Court to hear and determine the separate question at any point during the course of the trial, rather than only as a preliminary question. Mr Neill, for the defendant, made the submission that it was appropriate to consider this question at the conclusion of the plaintiff's evidence, as at that point all of the material relevant to whether or not the impugned clause was an unlawful restraint of trade was before the Court. It seemed to me that this was an appropriate course, and I gave leave for the application to be formally made, and heard submissions from the parties.

The factual background to the dispute

5. The plaintiff company provides technical support services to aircraft owners and operators, principally from Canberra Airport, but also at other regional airports. The provision of aircraft maintenance services is, properly, a highly regulated area, in that mechanics and technicians must be highly trained and maintain current certificates from the appropriate regulatory authorities to perform specific types of work. Moreover, the type of work is itself highly regulated, in that maintenance schedules and the like must be rigidly adhered to.

6. The defendant holds appropriate qualifications to service and maintain aircraft avionics, a specialised field. In January 2000 he commenced full-time employment with a company National Jet Systems, based in Adelaide. It was common ground that this company supplies and maintains certain aircraft that operate under the banner of Qantas Airways.

7. In early 2001 the opportunity arose for the defendant to transfer to Canberra as a full- time employee of National Jet Systems. I understand from the evidence that, while Adelaide is a major maintenance base for this company, Canberra is an airport where it is necessary to have an appropriately qualified technician on call for repair work as it arises, rather than for normal scheduled maintenance. As a consequence, while the defendant was employed on a full-time basis, the understanding was that he might not in fact be required for normal full-time hours and, so long as he was available on call when required, National Jet Systems had no objection to him undertaking other part- time paid work in the field of avionics while in Canberra.

8. It is common ground that the defendant met Mr Neil Allen, principal of the plaintiff company, when the defendant was visiting Canberra in January 2001 prior to making his transfer as an employee of National Jet Systems. There were discussions between them with a view to the defendant undertaking part-time work for the plaintiff at Canberra Airport. This would be work as a part-time contractor, not as an employee. This was mutually agreeable, and the plaintiff e-mailed a form of contract with an agreed hourly rate of pay, but without the exclusive dealing clause. It is common ground that the contract was signed by the parties in Canberra on 1 March 2001. It is immaterial to the determination of the question of law that the defendant maintains a defence of mistake, in that he asserts that he did not know of the exclusive dealings clause when he signed the contract.

9. The relevantly challenged parts of the contract are found in clauses 3 and 4, that provide (clause 3) that the agreement "shall remain in force for two years or whilst Nicholas Brolin is employed by National Jet Systems, whichever applies first", and (clause 4, final sentence) that:

Whilst you are working on Canberra Airport, Albury Airport or any Airfield within 75 nautical miles radius of Canberra Airport, you agree that besides National Jet, you will solely work under Capital Aircraft Services Pty Ltd Certificate of Approval.

10. The plaintiff asserts that, in mid May of 2001, during the currency of the contract, the defendant worked directly for a competitor, Vee H Aviation. For the purposes of this application, I will accept that as an established fact, and I will accept that such work would be contrary to the terms of clause 4 of the contract. The legal question for determination is whether such a clause is an unlawful restraint of trade.

The doctrine of unlawful restraint of trade

11. The existence of the doctrine of unlawful restraint of trade is well established, but like all legal doctrines, disputes abound concerning its application to particular facts. The doctrine is widely sourced to the remarks of Lord Atkinson in Herbert Morris Ltd v Saxelby [1916] AC 688 where his Lordship, looking back to an earlier decision of Nordenfelt Guns and Ammunition Co v Nordenfelt [1894] AC 535 referred to the following remarks of Lord Macnaghten where his Lordship said at 565:

The true view at the present time, I think, is this: The public have an interest in every person's carrying on his trade freely: so has the individual. All interference 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 and interference with individual liberty of action 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 interest of the parties concerned and reasonable in reference to the interest 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.

12. Lord Atkinson, in approving this passage, then said at 700:

If it be assumed, as I think it must be, that no person has an abstract right to be protected against competition per se in his trade or business, then the meaning of the entire passage would appear to me to be this. If the restraint affords to the person in whose favour it is imposed nothing more than reasonable protection against something which he is entitled to be protected against, then as between the parties concerned the restraint is to be held to be reasonable in reference to their respective interests, but notwithstanding this the restraint may still be held to be injurious to the public and therefore void; the onus of establishing to the satisfaction of the judge who tries the case facts and circumstances which show that the restraint is of the reasonable character abovementioned resting on the person alleging that it is of that character, and the onus of showing that, notwithstanding that it is of that character, it is nevertheless injurious to the public and therefore void, resting in like manner, on the party alleging the latter.

13. These propositions are well accepted. In Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126 the High Court (Gleeson CJ, Gummow, Kirby and Hayne JJ) said at 134-5:

A great number of the reported decisions respecting that doctrine turn upon the reasonableness of the restraint, particularly in relation to the legitimate interests of the parties. However, in particular cases, before the question of reasonableness is reached, there may be one or more threshold or preliminary questions requiring resolution. Three may be mentioned. First, it may be asked whether there is a "restraint" within the meaning of the doctrine. That is to be answered by having regard to the practical working of the alleged restraint rather than merely to its legal form. Secondly, it may be suggested that the restraint is not upon or in respect of "trade". Buckley v Tutty [1971] HCA 71; (1971) 125 CLR 353 at 373 established that, for the purposes of the common law doctrine, the notion of "trade" is not to be read narrowly, so that, for example, it is not limited to any category of skilled occupation and applies to employment generally. The third question is that with which this case is concerned, namely whether the restraint in question is one to which the doctrine applies so that, if the question is in the negative, there is no occasion to go on to consider the question of reasonableness.

14. It seems to me that the same question is central to the resolution of the present dispute. No evidence was lead in the plaintiff's case going to the existence of any industry practices or standards that would go to establishing the reasonableness of the restraint clause, and indeed Mr Allen acknowledged that the sole purpose of the clause was "to protect our current business" (transcript p 20 line 38). It seems to follow that the restraint, if restraint it be, cannot be said to be reasonable.

15. Of the preliminary questions described in Peters v Petersville, it seems to me that a prohibition of doing part-time work as a contractor for any other person must amount to restraint, looking at the practical working of the alleged restraint as well as its legal form. It must be recalled that this agreement is not a contract of employment, but rather an agreement for provision of part-time services on a contractual basis, with an agreed rate of remuneration, but with no provision for a minimum number of hours of work to be provided. Moreover, on its face as well as on the evidence, it is not the principal form of remunerative activity of the defendant. The defendant at the time was a full-time salaried employee of National Jet Systems, and this much is reflected in clause 3 of the agreement. The agreement relates to additional part-time work to be performed by the defendant, as a contractor, for the plaintiff company. It seems to me that a provision in the defendant's contract of employment with National Jet Systems that prohibited, or sought to regulate, his ability to undertake additional work in the field of avionics covered by his employment contract, during the life of that employment contract, could well withstand scrutiny. Prohibitions on employees "moonlighting" are relatively common in a range of industries (see Macken, O'Grady, Sappideen & Warburton, The Law of Employment (5^th ed 2002) Lawbook Co, p 152 ff) and have been upheld in some instances (Hivac Ltd v Park Royal Scientific Instruments [1946] Ch 169) although not in others (Weldon & Co v Harbison [2000] NSWSC 272). In the present case, however, we are not considering a prohibition on part-time employment during the course of full-time employment, but rather a provision that prohibits a person who is a full-time employee of a third party and is permitted by that employer to undertake part-time work from doing any additional part-time work, whether as contractor or employee, for any other party apart from the principal provider of part-time work. This must, it seems to me, amount to a restraint within the meaning of the doctrine.

16. On the second question, it seems to me that it must follow on the authority of Buckley v Tutty that for the purposes of the doctrine "trade" must cover the provision as a part- time contractor or employee of skilled aviation electronic services.

17. That leaves the question as to whether this restraint is one to which the doctrine applies, and it seems to me that if this is answered in the affirmative, the defendant must succeed on this application, because the only evidence going to the purpose of the clause is that it was to protect a business interest, that is, to protect against competition, and this cannot satisfy the burden which would be placed on the plaintiff to establish that the restraint is reasonable.

18. In describing this test in the passage set out above from Peters v Petersville, the majority expressly referred to the extra judicial writing of JD Heydon in The Restraint of Trade Doctrine (2^nd ed 1999) particularly pages 49 ff. The learned author discusses two approaches that emerged in the House of Lords. The first is a test developed by Lord Pearce in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1967] UKHL 1; [1968] AC 269, where his Lordship said at 328:

The doctrine does not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract, provided that any prevention of work outside the contract, viewed as a whole, is directed towards the absorption of the parties' services and not their sterilization.

19. The majority in Peters v Petersville fell short of adopting this approach, noting (at 148) that it contains "the same sorts of difficulties as do the other tests". In the context of the present case, however, where the agreement does not provide for any defined or minimum amount of work to be provided by the plaintiff to the defendant, it is hard to see how the restraint could be categorised going to "absorption" rather than "sterilisation" of services. On its terms, the agreement does not oblige the plaintiff to provide any minimum hours to the defendant, but does preclude the defendant from undertaking contractual work or additional employment in the avionics industry during the life of the agreement, even if little or any work is being provided by the plaintiff to the defendant.

20. An alternative approach, adopted in the same case by Lord Wilberforce, has been described as the "trading society" test. This approach has been extensively developed by Heerey J in his opinion on an appeal from this Court in Australian Capital Territory v Munday [2000] FCA 653; (2000) 99 FCR 72 in which he was joined by Miles and O'Connor JJ. Heerey J, takes this test from the remarks of Lord Wilberforce in Esso (at 335) where his Lordship, after extensively reviewing authorities where the doctrine has been held not to apply, in the context of "tied house" arrangements said:

One may express the exemption of these transactions from the doctrine of restraint of trade in terms of saying that they merely take land out of commerce and do not fetter the liberty to trade of individuals; but I think one can only truly explain them by saying that they have become part of the accepted machinery of a type of transaction which is generally found acceptable and necessary, so that instead of being regarded as restrictive they are accepted as part of the structure of a trading society. If in any individual case one finds a deviation from accepted standards, some greater restriction of an individual's right to "trade", or some artificial use of an accepted legal technique, it is right that this should be examined in the light of public policy.

21. Heerey J, in Australian Capital Territory v Munday, expressed the view (at 92) that:

... Lord Wilberforce's trading society test seems to have attracted on balance the approval of the High Court. If one might respectfully say so, it accords more satisfactorily with common law methodology and with the need for the law to adapt to methods of doing business which are constantly changing.

While acknowledging that the trading society test "has the great advantage of flexibility" Heydon (p 61 et seq) does point out some of its drawbacks. Public opinion may be incapable of seeing the evils of the restriction and commercial people may all be interested in keeping the system going. And will courts be able to apply the reverse process so as to bring within the doctrine a practice once seen as innocuous but now recognised as pernicious?

22. Accepting that this approach is binding on me, it seems that the "trading society" test cannot assist the plaintiff in this case, as it has brought no evidence to show that this type of arrangement is "part of the accepted machinery of a type of transaction which is generally found acceptable and necessary" so as to be "part of the structure of a trading society". On the contrary, the only evidence is that this clause was inserted to protect the plaintiff's business, and so it would. On the agreement, even if the plaintiff company was not in a position to offer work to the defendant, it could prevent the defendant from undertaking contractual work or part-time employment from others in the avionics industry in and around Canberra. Where a public policy approach is to be taken into account, as it seems to me it must under this test, a court should be particularly careful about extending the exemptions from the restraint of trade doctrine accepted as applying within employment contracts to agreements for independent contractors. It seems to me that all of the arguments in favour of exclusive dealing clauses within employment contracts (see Macken, above, and also A Brooks, The Limits of Competition: Restraint of Trade in the Context of Employment Contracts [2001] UNSWLJ 346) are based on the employee's duty of fidelity during the life of the employment. But this is of course a two way street, and the employee, in return for this fidelity, enjoys all the consequences of the employment relationship. The present agreement is expressly a contract for services, and excludes the defendant from workers compensation and insurance. There is no obligation to supply any work or any defined quantum of work. All that is provided for is that, should the plaintiff allocate work, it will be done at an agreed rate per hour. As independent contractor arrangements spread increasingly throughout the workplace, it seems to me that courts ought to be cautious about extending to such an arrangement considerations that are more appropriate for employment contracts. A duty of fidelity, and the corresponding tendency of common law courts to permit a degree of exclusive dealing within the life of the employment, should not, it seems to me, be extended to an arrangement where the contractor has no defined or specified amount of work to be provided by the principal.

23. I should add that it seems to me that this clause cannot be severed or read down. It means what it says, and what it says is that, for two years or for so long as the defendant is employed by National Jet Systems, he is limited to doing part-time work, whether as contractor or employee for the plaintiff, whereas the plaintiff has no obligation to provide any defined amount of work to the defendant. His services are sterilised on one test, and on the alternative test, the type of restriction and its unilateral nature benefiting only the plaintiff by preventing the defendant from offering his part-time services to any business competitor or competing on his own accounts, cannot be seen as an acceptable consequence of a trading society. Indeed, the effect of the terms is expressly anti-competitive and is inconsistent with a trading society.

24. It seems to me that the question should be answered in the affirmative and it follows that, as the exclusive dealing clause is void and of no effect on the grounds that it is contrary to public policy, the plaintiff's claim for relief in the proceedings be dismissed.

25. I will hear the parties as to consequential orders, and as to costs.

I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Connolly.

Associate:

Date: 17 August 2006

Counsel for the plaintiff: Mr B Meagher SC

Solicitor for the plaintiff: Colquhoun Murphy

Counsel for the defendant: Mr MJ Heath appeared on 12 and 13 December 2005 and Mr IM Neill appeared on 31 July 2006 and 1 August 2006

Solicitor for the defendant: Williams Love & Nicol

Dates of hearing: 12 and 13 December 2005, 31 July 2006 and 1 August 2006

Date of judgment: 17 August 2006