Harris/D-E Pty. Limited v McClellands Coffee and Tea Pty. Ltd. and Ors. [1999] NSWSC 128 (2 March 1999)

Last Updated: 3 March 1999

NEW SOUTH WALES SUPREME COURT

CITATION: HARRIS/D-E PTY. LIMITED V. McCLELLANDS COFFEE & TEA PTY. LTD. & ORS. [1999] NSWSC 128

CURRENT JURISDICTION: Equity Division

FILE NUMBER(S): No.2289 of 1994

HEARING DATE{S): 1, 2, 3, 4, 5, 8, 9, 10, 11, 12 February 1999

JUDGMENT DATE: 02/03/1999

PARTIES:

Harris/D-E Pty. Limited P

McClellands Coffee & Tea Pty. Ltd. 1D

Ambassador Foods Pty. Ltd. 2D

Phillip McClelland 3D

Jim Banks 4D

Eric Bellchambers 5D

Steven Holder 6D

JUDGMENT OF: Hodgson CJinEq

LOWER COURT JURISDICTION: Not Applicable

LOWER COURT FILE NUMBER(S): Not Applicable

LOWER COURT JUDICIAL OFFICER: Not Applicable

COUNSEL:

Mr. A. Sullivan QC with Mr. A. Spencer P

Mr. R. Conti QC with Mr. T. Hancock D

SOLICITORS:

Holding Redlich P

Deacon Graham & James 1-6D

CATCHWORDS:

CONTRACTS - Repudiation - Affirmation -RESTRAINT OF TRADE. Employee, bound by three-year contract and one-year restraint against completion after termination, writes letter to employer which asks for termination of his contract, but also suggests the terminations is a fait accompli. Employer and employee arrange a day two weeks later as employee's last day at work, on which day employee is paid ordinary pay, holiday pay, and long service leave calculated to that day, plus three months' 'termination pay'. HELD that letter was not a repudiation; that in any event employer had manifested an intention that the agreement end consensually and not by termination for breach; and that the employment terminated on the employee's last day at work, not three months later.

Western Excavating (ECC) v. Sharp (1978) 1 CR 222

Mason Gray Strange NSW V. Eisdell, Powell, J. SCNSW, 22/2/89

Siagian v. Sanel (1994) 122 ALR 333

ACTS CITED:

DECISION:

See par.118 of judgment

JUDGMENT:

45

IN THE SUPREME COURT

OF NEW SOUTH WALES

EQUITY DIVISION

CORAM: HODGSON,CJ IN EQ.

Tuesday 2nd March 1999

NO. 2289 OF 1994

HARRIS/D-E PTY. LTD. V. McCLELLAND'S COFFEE & TEA PTY. LTD. & ORS.

JUDGMENT

1 HIS HONOUR: Prior to 24th August 1991, E.H. Harris & Co. Pty. Limited (which I will call "E.H. Harris") carried on the business of processing and selling coffee and tea products throughout Australia, a business which also involved the sale of certain ancillary products such as portions of UHT milk, sachets of sugar, and other items. Pursuant to a contract dated 24th August 1991, Douwe-Egberts NV (a Netherlands company which I will call "D-E") acquired that business from E.H. Harris for a price of about $33 million, of which about $20 million was apportioned to goodwill. By a licence agreement of the same date, D-E licensed the business to the plaintiff Harris/D-E Pty. Limited.

2 Each of the third defendant Phillip McClelland, fourth defendant Jim Banks, fifth defendant Eric Bellchambers, and sixth defendant Steven Holder were employees of E.H. Harris prior to 24th August 1991, and after that date became employees of the plaintiff. Phillip McClelland entered into a written service agreement dated 30th August 1991 with the plaintiff, which provided for a term of three years after which it was terminable on three months' notice. The agreement also contained a term that Phillip McClelland would not carry on or be engaged in any business competitive with the plaintiff's business for one year after termination of the agreement.

3 In September 1991, Phillip McClelland became director of the second defendant Ambassador Foods Pty. Limited, and since about October 1992 he and his family have been the sole shareholders of that company. The first defendant McClelland's Coffee & Tea Pty. Limited was incorporated on 14th April 1993, with Phillip McClelland and his wife becoming directors and Phillip McClelland and Ambassador Foods sole shareholders.

4 Phillip McClelland ceased working with the plaintiff on 8th July 1992. Later in 1992, or early in 1993, Ambassador Foods commenced selling some of the ancillary products previously sold by E.H. Harris and the plaintiff; and after 8th July 1993, began selling coffee and tea products.

5 In these proceedings, commenced 6th May 1994, the plaintiff seeks damages against Phillip McClelland for breaches of his service agreement, in particular the term against competition. Similar damages are sought against the first and second defendants, and also the sixth defendant Mr. Holder, on the ground of known participation in Phillip McClelland's breaches of his agreement.

6 The fourth defendant Mr. Banks ceased to be an employee of the plaintiff on or about 1st September 1993; and the fifth defendant Mr. Bellchambers ceased to be an employee of the plaintiff on about 30th July 1993. The plaintiff claimed damages against those defendants for breach of their contracts of employment, on the basis that they gave assistance to the first and second defendants while still employed by the plaintiff. The plaintiff now concedes that it cannot succeed against the fifth defendant, and that it can obtain at best nominal compensatory damages from the fourth defendant.

7 The plaintiff also claims exemplary damages.

OUTLINE OF FACTS

8 Prior to August 1991, Phillip McClelland's father Kenneth McClelland was Chairman and Managing Director of E.H. Harris. Phillip McClelland was Sales and Marketing Manager. They had both been engaged in the coffee and tea business virtually all their working lives.

9 E.H. Harris operated separate food service and retail divisions. The former made up about two-thirds of its business. The food service division served the hospitality industry, including hotels, motels, catering companies and airlines. It sold coffee and tea to these organisations which in turn supplied those products to customers. It also sold packaged sugar, UHT milk, jams and cookies, which E.H. Harris obtained from other suppliers. E.H. Harris packaged the sugar, but other products were acquired already packaged. Jams and cookies did not carry the Harris name. The ancillary products made up about eighteen percent of total sales. In general, they were sold to customers who were also buying coffee and tea, but occasional sales were made to customers who did not also buy coffee and tea.

10 The assets of E.H. Harris and associated companies included a shop in the Strand Arcade, Sydney, selling coffee and tea, and buildings in Mandible Street, Alexandria. There were branch offices established in Melbourne, Adelaide, Brisbane, Perth, Canberra and Newcastle. There had recently been purchased a property at Forrester Street, Kingsgrove.

11 The sale of the business to the plaintiff was negotiated for the vendor by Kenneth McClelland, and for the purchaser mainly by Cor Boonstra, Chief Executive Officer of D-E, and Allan Rogers, the Group Chief Executive Officer of Grocery Products Australia for Sara Lee Holdings (Australia) Pty. Limited (a subsidiary of Sara Lee Corporation of Maryland, which corporation was also the holding company of D-E).

12 The sale agreement between E.H. Harris (in the agreement called "Harris") and its associated companies (in the agreement respectively called "Properties", "Strand" and "McClelland Properties") and D-E was dated 24th August 1991. The agreement included the following definitions in cl.1:

(4) "the Business" means Harris' trade and undertaking in the purchase, processing, packing and distribution of coffee and tea throughout Australia and includes the retail operation conducted by Strand in the Strand Arcade, Sydney as at the Completion Date.

(5) "the Completion Date" means the 30th day of August 1991 or such other date as shall be mutually agreed by the parties hereto.

13 Clause 12 provided that D-E should procure that the plaintiff employ Phillip McClelland on terms of a draft service agreement which was annexed. Clause 19 provided for leases to the plaintiff of identified Harris premises in Alexandria, Kingsgrove and Mansfield in Queensland. Clause 20 was in the following terms:

20.1 Each of Harris Strand Properties and McClelland Properties warrant and undertake to D-E that, for the protection of D-E in respect of the goodwill of the Business, Harris will not, whether on its own account or jointly with or on behalf of any other person or corporation as an independent contractor, partner, joint venturer or agent carry on or be engaged in any business competitive with the Business within Australia for a period of 3 years after the Completion Date.

20.2 The provision of clause 20.1 shall not prevent Harris from holding either directly or indirectly shares in D-E or less than 5% of the issued capital of any company listed on a recognised stock exchange where such company may be engaged in a business competitive with the Business.

14 Three other agreements were also dated 24th August 1991. First, a Shareholders Deed, whereby E.H. Harris was to acquire five percent of the plaintiff's shares. Second, an agreement whereby D-E licensed the business it was acquiring to the plaintiff. Third, an asset acquisition agreement between D-E and the plaintiff, the terms of which are not here relevant.

15 The service agreement between the plaintiff and Phillip McClelland, contemplated by the main agreement, was subsequently executed and dated 30th August 1991. Relevant provisions are the following:

1.1 In this Agreement unless the context otherwise requires:

"the Business" means the business of purchasing, processing, packaging and distributing coffee and tea and such other business or businesses as the Company may from time to time designate;

"the Term" means the period during which this Agreement and McClelland's engagement by the Company continues, as provided by Clause 21.

2.1 The Company will employ McClelland in the Business under the designation of General Manger - Sales and Marketing and McClelland will serve the Company during the Term in accordance with this Agreement.

2.2 This Agreement will continue for a period of 3 years and shall be renewed thereafter from year to year unless terminated by either party in accordance with the provisions of Clause 5

4.1 McClelland will:

...

(4) keep confidential all information which McClelland may receive concerning the affairs of the Company or the Business and not at any time during the Term or thereafter except at the direction or with the prior approval of the Company divulge either directly or indirectly to any person or company any knowledge or information which McClelland may acquire or have acquired during the course of or incidental to McClelland's employment by the Company (whether during the Te4rm or prior thereto) concerning the affairs or property of the Company or the Business or any business, matter or transaction in which the Company may be or may have been concerned or interested;

5.1 This Agreement may be terminated by either party without cause on three months' notice to the other which notice may be given at any time after (but not before) the expiry of the three year period specified in Clause 2.2

5.2 The Employer may terminate the employment of McClelland by notice in writing at any time if McClelland:

(1) commits any serious breach or is persistently in breach of any of the provisions of this Agreement;

(2) is guilty of any grave misconduct or of any wilful neglect in the performance of McClelland's duties;

(3) suffers any physical or mental illness which continues for a period which exceeds 90 days and prevents McClelland from attending properly to McClelland's duties hereunder;

(4) is declared bankrupt or enters into any composition or arrangement with or makes any assignment of McClelland's property in favour of McClelland's creditors generally; or

(5) is found guilty of any criminal offence.

6.1 McClelland warrants and undertakes to the Company that McClelland shall not:.

(i) on his own account or jointly with or on behalf of any other person or corporation as an officer, employee, independent contractor, partner, joint venturer or agent

(ii) nor shall any firm or corporation (other than a company of a type referred to in clause 6.2) in which he may be interested as an employee, director, shareholder, beneficial owner or controller of shares, lender or adviser;

carry on or be engaged in any business competitive with the Business within Australia for a period of one year after the date of termination of this Agreement.

6.2 The provisions of Clauses 4.1(6) and 6.1 shall not prevent McClelland from holding either directly or indirectly less than 5% of the issued capital of any company listed on a recognised and substantial stock exchange where such company may be engaged in a business competitive with the Business or shares in the Company.

16 After the acquisition, Allan Rogers became a member of the Board of the plaintiff. Kenneth McClelland was also on the Board, and was employed as Executive Chairman of the plaintiff. Although as such Kenneth McClelland was Chief Executive Officer of the plaintiff, it seems that Allan Rogers, his superior in the Sara Lee/D-E organisation, exercised some control over the plaintiff's operations. This led to some dissatisfaction on the part of Phillip McClelland.

17 Phillip McClelland wrote to Mr. Boonstra in The Netherlands a letter dated 17th January 1992, in the following terms:

As you are aware, it is now 4.5 months since Sara Lara (sic) acquired the majority of the Harris business

I am writing to you to express my disappointment and concern in retard to the ongoing management of this organisation.

From day one, that is, from our initial meeting with you in June 1991, it was clearly indicated that the Corporate policy was "The people who built this business should continue to run it". This has been restated, re enforced (sic) by all Sara Lee personnel with which we have had contact, all that is, with the exception of Allan Rogers.

Rogers, it would seem, is determined to take complete control over Harris/D-E but at the same time leave himself room to pass the blame onto someone else when things go wrong.

Our monthly executive meetings are somewhat of a joke in so much as Rogers only hears what Rogers wants to hear. Unless Rogers himself brings up initiatives, or indeed if somehow he can be made to believe that a new idea is his and his alone, then it goes nowhere.

His introduction to Harris on October 2nd 1991 of his "Marketing Guru" Lyn Robinson, who I found to be the most arrogant self opinionated person I have ever had the misfortune to meet, was the first step in his endeavour to take complete control. A move which failed only after numerous confrontations.

With the introduction of Moccona to this organisation scheduled for July 1st 1992, a date which is rapidly approaching, we still have not been afforded the courtesy of any significant information of the Moccona operation in Australia. Indeed it is becoming obvious that Stuart Alexander personnel who will be transferred to Harris/D-E are the preferred management team for the future. I presume because they only tell Rogers what he wants to hear.

Complete integration of the two operations cannot be effected without any adequate computer system. Rogers employed a consultant (Klaus Sbresny) who subsequently produced a report and recommendation on the Harris & Stuart Alexander information systems. This report was rejected as unworkable and inadequate not only by Harris personnel, but also by Stuart Alexander. Our EDP Manager (Peter Wilson) then produced an excellent report indicating exactly what was required, not only for complete integration but also to fulfill (sic) Sara Lees (sic) Corporate requirements. This report brought Klaus back in basically to tear this report apart, yet another example of what Rogers wants Rogers gets.

My concern is that if Rogers (sic) plan is implemented it will basically fail and when it does, I do not want to give Rogers the opportunity of passing the blame onto (sic) Peter Wilson, who I might add had done an excellent job for Harris over the past 8 years and knows our need and requirements inside out. I believe Peter in fact to be far superior in ability and application of practical solutions than is Klaus Sbresny (who, I am led to believe has been offered a permanent job in Rogers power base at North Sydney).

Cor, I believe Harris/D-E has a great future and when coupled with Moconna will be virtually untouchable in the Tea & Coffee Industry in Australia. My concern is that if Rogers is let to continue down this virtual path of destruction then Harris/D-E will fail.

I have put 19 years of hard work into this organisation and will not stand back and see it destroyed by one man. It is painfully obvious that the only way to perceivably succeed in Sara Lee Australia is to be a Rogers "Yes Man". I am not a yes man and never will be. I say what I think and do what I know is right in the best interests of the company.

Sending you this letter has put my position in jeopardy, a move I would not make unless I believe it to be in the best interests of this Company.

('Moccona" was a brand of coffee previously marketed in Australia by D-E, and it was proposed to integrate this business with the business acquired from E.H. Harris). No copy of this letter was provided either to Mr. Rogers or to Kenneth McClelland.

18 In February 1992, Kenneth McClelland attended a strategy meeting in The Netherlands, at which time he conveyed to Mr. Boonstra and Mr. Rogers that he did not wish to stay on as Executive Chairman. In March 1992, Kenneth McClelland left the employment of the plaintiff, although he continued as non-executive chairman. He continued to attend regularly at premises owned by E.H. Harris, part of which were leased to the plaintiff, and in that way maintained some contact with the plaintiff's activities. On 25th March 1992, Phillip McClelland was appointed a director of the plaintiff.

19 In May 1992, Phillip McClelland went to The Netherlands to meet D-E personnel. One person he met was Henk De Wilt, a senior officer of D-E in The Netherlands. On his return to Australia, Phillip McClelland wrote a letter to Mr. De Wilt dated 26th May 1992, in the following terms:

As I only arrived back in Sydney yesterday (25/05) this is the first opportunity that I have had to sincerely thank you for the hospitality that you extended to Joanne and myself during our recent visit.

During our discussion in Utrecht we discussed the problems that Harris/D,E, are experiencing with Allan Rogers. Upon my return it has become immediately apparent that the situation has deteriorated substantially, to the point of being, not only completely unworkable but, in my opinion to the detriment of the Company.

We are no longer able to trade using our traditional methods. This is now showing through in the form of lower sales figures, which can directly be attributed to the policies of Rogers.

We are compelled to trade on the same philosophies as Kitchen of Sara Lee, which may work well for frozen cakes, but certainly does not work for selling Tea and Coffee in Australia.

I am given little or no control over policy decisions effecting the Company and have been allowed no input into the integration of Moccona/Moccomat.

Whilst I have the position of General Manager, I am prevented, by Rogers, from effectively carrying out that role.

I have seen over the past few years our 2 main competitors taken over by multi nationals, the results have been devastating. These 2 companys (sic) now virtually cease to exist. Rogers is destroying Harris in exactly the same manner.

One of our great strengths at Harris has always been our people - people make it happen. We have a great team at Harris but as each day goes past they are becoming more and more disenchanted and de-motivated to the point that we are in very real danger of losing the key players in this organisation.

I have watched and have been a part of the growth of Harris and I will not stand by and watch it be destroyed by one man.

I will not allow Rogers to pass the blame onto any of my staff when it is obvious to everyone here at Harris where the problem is.

I sincerely hope that you can assist me in preventing certain disaster

If you wish to discuss this problem please contact me on the following numbers:

Harris (until 28/5/92) - Alexandria

Tel: [phone]

Fax: [phone]

Harris (after 2/6/92) - Kingsgrove

Tel: [phone]

Fax: [phone]

Home

Tel: [phone]

No copy of that letter was provided to Mr. Rogers, who was acting as Chief Executive Officer of the plaintiff following Kenneth McClelland's retirement.

20 On 27th May 1992, Phillip McClelland sent a facsimile to Phil O'Callahan and Keith Alm, two senior officers of Sara Lee Corporation in the following terms:

In reply to why we are $126,000 behind plan is a direct result of the Sales and Marketing policies we have been forced to implement by Allan Rogers.

I expect that we will fall further behind unless we can revert to our traditional Sales and Marketing methods. Under the policies of Allan Rogers it now appears unlikely that we will achieve our plan FY92. This is impossible to quantify as it is only just becoming apparent the extent of the damage caused by the policies of Allan Rogers.

21 On 9th June 1992, Phillip McClelland received a telefax from Mr. De Wilt, addressed to "Phil" and signed "Henk", in the following terms:

Only yesterday, after his return of a three week trip, I had the opportunity to discuss the content of your last telefax with Mr. Boonstra.

We agreed that I would let you know about our conversation. Mr. Boonstra will pay appropriate attention to the issue.

22 There is in evidence a memorandum dated 19th June 1992 produced on subpoena by Sly & Weigall, Solicitors, referring to Phillip McClelland and the plaintiff, and continuing:

Attending you discussing your Service Agreement with Harris D-E. Advising on term and restraints.

You would raise the matter with Alan Rogers to seek a reasonable basis for terminating your employment.

23 On 22nd June 1992, Phillip McClelland sent by facsimile a letter to Mr. Boonstra, together with a document by which he purported to resign as a director of the plaintiff as from 22nd June 1992. The body of that letter was as follows:

Following on from my letter of 26th May 1992 to Mr H de Wilt in which I outlined the difficulties I am experiencing with Allan Rogers.

The way Rogers is running the company is so totally opposed to what I believe to be the correct way to get the results that the conflict is now having an adverse effect on the Company.

It is, therefore, with deep regret, that I ask for the termination of my contract. I am, within reason, willing to do anything to ensure that the severing of this relationship causes the minimum of disruption to Harris/D-E. To this end I am prepared to stay at Harris until 26th September 1992.

I will inform Rogers of this communication tomorrow (Tuesday 23rd June 1992) but I would prefer not to deal with Rogers in regard this termination.

I wish you and the Company well for the future and hope that one day the true facts about Harris/D-E will somehow surface.

24 On the same day, a confidential facsimile was sent by Mr. Boonstra to Mr. Alm, which so far as relevant was in the following terms:

I spoke to Allan Rogers, Monday evening Sydney time, about a letter I received from Phil McClelland (see encl.). Phil told us that he resigned and is proposing to stay until September 26, 1992.

You already know how I think about his skills to communicate the way he did in the past and also his attitude to try to blame Allan for his bad results are quite aggravating.

We in the company do not have a policy that we leave a manager in his responsibility after it has become clear that he is not performing or is willing to leave, so we have to take Phil out as soon as possible.

I would like to have legal advise (sic) in respect of stopping Phil to ever start an out-of-home or retail coffee business. Probably, Phil is going to blame us for his failure and as a human being, is going to try to prove to us that the way he wants to do business is more successful. So let us look at the legal side now.

Secondly, please make sure that his father is well informed and that his brother-in-law and uncle stay on board.

25 On 23rd June 1992, there was a meeting between Messrs. Rogers, Alm, Keith McClelland and Phillip McClelland. There is some dispute as to what was said at that meeting. It appears that Phillip McClelland's letter of 22nd June 1992 was described as a "resignation". It seems clear that Mr. Rogers and/or Mr. Alm indicated to Phillip McClelland the plaintiff's acceptance that Phillip McClelland should go, and should go sooner rather than later. At that or another meeting it was agreed between Mr. Rogers and Phillip McClelland that his last day at work would be 8th July 1992. The resignation as director was accepted, purportedly at a meeting between Kenneth McClelland and Mr. Rogers recorded as having taken place early on 22nd June 1992.

26 On 23rd June 1992, Phillip McClelland purchased a coffee roaster, with the capacity to roast 1kg of coffee. He subsequently paid cash for this roaster.

27 On 8th July 1992, Phillip McClelland attended for his last day, and received a final payment as calculated by the plaintiff's accounting staff. That payment comprised ordinary pay to 8th July 1992, holiday pay and long service leave calculated on service to 8th July 1992, and three months' "termination pay". A statement setting out the relevant amounts was signed by Phillip McClelland, as requested by Mr. Rogers.

28 It seems clear that around the time he ceased working with the plaintiff, Phillip McClelland formed the intention to go back into the coffee and tea business after 8th July 1993, which he understood to be the end of the restriction against competition. It also seems clear that, at least by about October 1992, he had formed the intention to sell other food products in the meantime, including some of the ancillary products sold by the plaintiff, and in doing so, to deal with customers of the plaintiff. Phillip McClelland said in evidence that this was to give himself and his staff something to do, and also to maintain contact with customers to facilitate subsequent sales of coffee and tea.

29 After 8th July 1992, Phillip McClelland attended the E.H. Harris offices at its Kingsgrove premises, where he would see employees of the plaintiff, including Mr. Holder, who was then the National Sales Manager of the plaintiff. It seems clear that on these occasions they had some discussion of Phillip McClelland's plans. Mr. Holder resigned from the plaintiff's employment on 13th October 1992.

30 By 22nd July 1992, Phillip McClelland had reserved the name Ambassador Foods Pty. Limited.

31 One significant customer of the plaintiff was the Flag Group. Between 9th and 14th August 1992, Phillip McClelland attended the Flag convention in Perth, and addressed the conference on behalf of the "preferred suppliers" of the Flag Group, of which the plaintiff was one. Thereafter, he discussed with Flag representatives the possible appointment of Ambassador Foods as a preferred supplier, giving rise to a letter from the Flag Group dated 20th October 1992 setting out the terms relating to such employment. Phillip McClelland replied to that letter by a letter dated 24th November 1992, in the following terms:

As you are aware we will be supplying the Hospitality Industry with Australian made products.

It is our intention to commence supplying the industry early February 1993. Currently we are finalising our Product Range and Pricing and expect to be able to formally seek Preferred Supplier status in the second half of January 1993 at which time I will meet with you in Melbourne to further discuss this matter.

In the meantime Steve and I would like to wish you and your family a very merry Christmas and safe and happy holiday season.

The "Steve" referred to in the letter is Mr. Holder.

32 In about October 1992, Phillip McClelland and his family obtained control of McClelland Properties Pty. Limited, and changed its name to Ambassador Foods Pty. Limited.

33 The Country Comfort Group was another significant customer of the plaintiff. A letter dated 26th November 1992 was sent to that Group, signed by Phillip McClelland and Mr. Holder, in the following terms:

We have found a new Home!!

Ambassador Foods Pty. Ltd

18 Forrester Street

Kingsgrove NSW 2209

Phone: [phone]

Fax: [phone]

We look forward to seeing you soon to explain the Australian made products Ambassador are providing to the Hospitality Industry.

34 A letter dated 18th January 1993 was sent to the Best Western Group, signed by Mr. Holder, in the following terms:

Further to our recent discussions relative to 'Ambassador Foods' desire to become a Preferred Supplier for Best Western, please find attached our price schedule which is effective from February 1st 1993.

As mentioned we would be prepared to pay a monthly rebate of 5% on total purchases to Best Western Head Office. We would also be happy to attend your Annual Conference and any Zone meetings to help promote our products.

We are now in the process of having artwork & designs prepared for a private label (Best Western) After Dinner Mints. As soon as this is available I will make an appointment to see you.

Jon, thank you for taking the time to meet with me and we look forward to the opportunity of being Preferred Suppliers for Best Western.

It enclosed a six-page price schedule, including such items as UHT milk, sugar, jam and cookies.

35 1st February 1993 is the date when, according to Phillip McClelland, Ambassador Foods commenced business, and when Mr. Holder commenced his employment with Ambassador Foods. Apparently its first sale, of a cocktail mix, was made on 8th February 1993. From this time, or shortly afterwards, its business was conducted from the E.H. Harris premises in Mandible Street. The staff initially comprised Phillip McClelland and Mr. Holder. Later they were joined by other ex-employees of the plaintiff. Barry Stittson had been dismissed by the plaintiff, was unemployed for a period, and joined Ambassador Foods on 5th March 1993. Marie Stepan, who had been Phillip McClelland's secretary, approached him and said she had to leave the plaintiff, and asked for a job. She was employed from 19th April 1993.

36 Thereafter, until 8th July 1993, Ambassador Foods was in correspondence with its customers, including customers of the plaintiff, in relation to its sale of ancillary products, including products sold by the plaintiff. Its total sales in that period amounted to just over $24,000.00. This included about $6,000.00 sales of cookies, about $6,000.00 of UHT milk, and about $3,500.00 sales of jams. Other items not previously sold by the plaintiff included cocktail mix and confectionary.

37 Over the same period, there was contact between employees of the plaintiff, and Phillip McClelland and/or Mr. Holder. The evidence in the case suggests that the initiative in these contacts mainly came from the plaintiff's employees, who expressed some dissatisfaction with their employment and enquired about the possibility of employment with Phillip McClelland. It appears that it was conveyed to them that there would be no possibility of employment before 8th July 1993, but there could possibly be employment after that date.

38 One of the plaintiff's employees, John Clark, who managed the plaintiff's business in Cairns, gave evidence that in April 1993, Mr. Holder offered him a salary package if he would join Ambassador Foods after 8th July 1993. Mr. Holder denied that he did more than discuss the possibility of such employment. In early May 1993, Phillip McClelland went to Cairns to see Mr. Clark. Mr. McClelland's evidence was that he was considering employing Mr. Clark when he went back into the coffee and tea business after 8th July 1993, and was concerned that Mr. Clark might leave the plaintiff's employment and obtain employment elsewhere in the meantime. He wanted to persuade Mr. Clark to continue with the plaintiff, until he might be employed by Ambassador Foods.

39 On 21st May 1993, Industrial Sugar Mills wrote to Phillip McClelland a letter which referred to their meeting of 4th May 1993, and provided prices for packing portion-controlled sugar and coffee products. A hand-written note on the bottom of the letter records: "28/5/93 Samples of coffee delivered to Phillip at Ambassador".

40 On 7th June 1993, Sly & Weigall, Solicitors, wrote a letter of advice to Phillip McClelland, in the following terms:

We refer to discussions with you concerning the termination of your Employment Agreement with Harris/D-E Pty Limited and your proposed entry into the business of buying and selling tea and coffee.

Your Service Agreement with Harris/D-E Pty Limited imposes certain restraints on you which are to operate for a period of 1 year after date of termination of the Agreement. We have reviewed the letter sent by you to the Chairman of the Board of Management of Sara Lee/D-E NV on 22 June 1992 seeking termination of the Agreement with effect from 26 September 1992. On the following day Mr. Rogers of Harris/D-E Pty. Limited advised you that you could end your connection with the company on 8th July 1992 and your entitlements to pay and other severance benefits were implemented on that date.

You are familiar with the terms of the restrain but put simply they restrict you for a period for 12 months from either directly or indirectly carrying on or being engaged "in any business competitive with the Business within Australia for a period of 1 year after the date of termination of this Agreement.

"Business" is defined as purchasing, processing, packaging and distributing coffee and tea and such other business or businesses as the company from time to time designate. It is assumed that no other business has been designated by Harris/D-E Pty. Limited as business carried on by it.

To date you have:

1. Established a company called "Ambassador Foods Pty. Limited" which has commenced trading in the catering area but not in tea and coffee;

2. Purchased plant and equipment to be used in connection with the tea and coffee business but as yet have not yet commenced operating the plant;

3. Discussed packaging to be used by you for coffee marketed under the name "McClelland Coffee";

4. Ordered overseas supplies of raw coffee for delivery to Australia on the basis that delivery will not take place before 8 July 1993;

5. Ordered glass bowls branded "McClelland Coffee" to be manufactured in the USA.

The only one of these activities which in our opinion would be in breach of the restraint covenant is the placing of orders for supply of coffee. Even though the coffee is not to be delivered until after expiration of the restraint period, we believe that the act of ordering would constitute purchasing and on the basis that it must be expected that Harris/D-E Pty. Limited will take every step possible to frustrate your business activities, we believe it would be in your interest to cancel those orders and re-order after the expiration of the 12 month period.

We also discussed the question of employing former employees of E.H. Harris & Co. Pty. Limited and while such actions are not unusual, you could be rendered liable if it can be established that you have induced employees of Harris/D-E Pty. Limited to breach their Employment Agreements. We note that you have been approached by a number of Harris/D-E employees seeking employment with you and although technically there can be no objection provided you have done nothing to induce them to leave there remains the risk that Harris/D-E will seek to establish a more sinister role on your part. If you are approached by Harris/D-E employees, you should be careful to record the time and circumstances and avoid any possibility of a later suggestion that you have contributed in any way to them terminating their existing employment arrangements.

We note that you presently have the use of telephone services formerly used by E.H. Harris & Co. Pty. Limited, and that care is being exercised to ensure that there is no suggestion that the business of buying, selling or marketing tea and coffee is for the time being carried on by you.

Subject to the item of purchasing raw coffee, we are of the opinion that none of your activities to date would constitute breach of the terms of your restraint covenant but repeat our warning that every care should be taken to avoid any situation which might give to Harris/D-E Pty. Limited the excuse of commencing disruptive proceedings against you.

In evidence, Phillip McClelland said that no order for coffee had in fact been placed at that time. However, he agreed that he had purchased plant and equipment to be used in connection with the coffee and tea business. In particular, he said that a coffee roaster, with the capacity to roast about 65 kilograms of coffee, was purchased about this time; although it was not installed and able to roast coffee until about September 1993.

41 On 9th July 1993, Mr. Holder on behalf of Ambassador Foods wrote a letter to the Director of Purchasing, Conrad Jupiters, which was a customer of the plaintiff. This letter was in the following terms:

Thank you for taking the time to meet with Les Haigh and myself. We now have great pleasure in introducing Conrad International Hotel & Jupiters Casino to the new player in the Australian Coffee & Tea market McCLELLAND'S COFFEE & TEA.

McClelland's Coffee & Tea are a wholly Australian owned company that has recently been established. Our team comprises of staff and management that have been associated with the coffee and tea industry for many years, and have the professionalism and expertise to provide for all your requirements.

We at McClelland's have developed and produced a range of high grade coffee and tea to ensure your patrons are enjoying a quality cup of coffee and tea.

We are a National Company and will have branches throughout Australia by the end of August 1993. Our major objectives are to provide to all our customers a Quality Product, Reliable Service and a Friendly Face.

Trevor, we would be grateful if McClelland's would be given the opportunity to quote in the near future, and if we can offer assistance in any way please do not hesitate to contact us.

Assuring you of our very best attention at all times.

42 According to evidence given by Phillip McClelland, the first order placed for coffee was an order dated 20th July 1993 for instant coffee, and the first order for coffee for roasting was placed on 23rd August 1993. His evidence was that the first coffee was sold by Ambassador Foods in about September 1993; but he did concede that, on or shortly after 9th July 1993, through Ambassador Foods he commenced competing with the plaintiff in respect of coffee and tea products.

43 On 24th July 1993, advertisements for sales staff for Ambassador Foods were placed in newspapers in Sydney, Melbourne, Adelaide, Brisbane and Cairns. These resulted in large numbers of job applications, but in the event the positions were filled by employees or ex-employees of the plaintiff with whom Phillip McClelland or Mr. Holder had previously been in contact. Subsequently, statutory declarations were made by these persons, of which the following, made by Mr. Clark on 15th December 1993, is typical:

1. I approached Phillip McClelland of my own volition concerning the possibility of obtaining employment.

2. I have since applied for employment with Ambassador Foods Pty. Limited (Ambassador Foods).

3. No offer of employment was made to me before 8 July 1993 by Phillip McClelland, Ambassador Foods or any person associated with Mr. McClelland or Ambassador Foods.

44 In September 1993, Ambassador Foods applied to Westpac for finance, to replace its existing bankers. In a credit proposal dated 15th September 1993, signed by the Commercial Manager, Mr. Kaye, the following was noted:

Phillip McClelland was earlier this year contacted by executives of several large corporations (i.e. clients) who were very unhappy with the service currently being provided (via distributor agencies) by the Harris/Moccona Company and they have offered to move their business to him if he re-establishes the McClelland family Coffee and Tea business as a competitor to Harris/Moccona.

Since Phillip McClelland has left the Company, 16 key personnel for Harris/Moccona throughout Australia have also left to join him to recommence the old business on a smaller scale (1/3rd size).

However, in cross-examination Phillip McClelland denied that he had spoken to clients of the plaintiff about coffee and tea at any time prior to 9th July 1993.

ISSUES

45 The following issues have been debated in this case.

46 First, there are questions concerning the construction of the service agreement between the plaintiff and Phillip McClelland. The central issue concerns the meaning of "the Business" used in cl.6.1 and defined in cl.1.1. There is also a question whether a term alleged by the plaintiff is to be implied in the agreement.

47 Second, there is a claim for rectification of the agreement, which the plaintiff wishes to pursue in the event of a restrictive construction being given to "the Business".

48 Third, there is the question whether Phillip McClelland repudiated his service agreement, and whether any such repudiation was accepted by the plaintiff; or alternatively, whether the service agreement was terminated by agreement between the parties.

49 Fourth, there is the question of the duration of the restraint under cl.6.1 of the agreement. If the termination was consensual, the question is whether the period of the restraint runs from 8th July 1992, or from some day in September or October 1992. If there was repudiation and acceptance of repudiation, there is the question of whether the plaintiff is entitled to damages calculated on the basis that, but for his repudiation, Phillip McClelland would have been bound by a restraint against competition running the full three-year term of the service agreement plus one year thereafter.

50 Fifth, there is the question whether Phillip McClelland has been in breach of cl.6.1 of the service agreement. This question involves some issues of credit, concerning alleged approaches by Phillip McClelland and Mr. Holder to customers and employees of the plaintiff.

51 Sixth, there is the question of whether the plaintiff has established a breach by Mr. Banks of his contract of employment. This raises a question of credit also. However, it is common ground that even if breach is shown, no damages flowing from the breach have been proved.

52 Seventh, there is the question of the liability of the first and second defendants for knowing participation in Phillip McClelland's breach of contract, if that be proved.

53 Eighth, there is then a similar question in relation to Mr. Holder.

54 Ninth, there is the question of the basis on which damages are to be assessed, particularly against Phillip McClelland.

55 Finally, there is the question of the plaintiff's claim for exemplary damages against all defendants, but in particular against Phillip McClelland and Mr. Holder.

56 I have been provided with quite extensive written submissions, and I will be brief in my recounting of these submissions.

CONSTRUCTION OF SERVICE AGREEMENT

Submissions

57 Mr. Sullivan QC for the plaintiff submitted that the same construction should be given to the expression "the Business" in the service agreement as in the sale agreement. Furthermore, it was permissible to take into account background facts known to the parties or notorious: Codelfa Construction v. State Rail Authority of NSW (1982) 149 CLR 337 at 352; Prenn v. Simmonds (1971) 1 WLR 1381; Reardon Smith Line v. Hansen-Tangen (1976) 1 WLR 989. In this case, such facts included that E.H. Harris' trade included the sale of ancillary products, which were sometimes sold separately; that D-E had purchased the whole of E.H. Harris' business, including stock-in-trade and equipment, such stock-in-trade including ancillary products and equipment including equipment used for packaging sugar; that allocation of goodwill to various parts of the business was based on total sales, including sales of ancillary products; that the sale of ancillary products provided a service to customers; and that D-E or the plaintiff would continue to conduct the same business. Accordingly, cl.6.1 of the service agreement operated to prevent Phillip McClelland from being involved in any business in the food services sector involving the sale of any of the products which, prior to the acquisition, were being sold as part of E.H. Harris' business.

58 Alternatively, there should be implied on the basis of business efficacy a term in the service agreement that, for a period of one year after termination of the agreement, Phillip McClelland would not seek or solicit or deal with customers of the plaintiff or employees of the plaintiff on behalf of any business which was competitive with that of the plaintiff.

59 Mr. Conti QC for the defendants submitted that the pre-contractual documents showed the minimal importance of products other than coffee and tea: they were not specified in such documents, and amounted to only 18% of gross sales. Coffee and tea was what the business was all about, and that is where the goodwill of the business lay. Mr. Conti pointed to variations between the definitions of "the Business" in the two agreements, and submitted that agreements restraining employees should not be given a wide interpretation. Accordingly, cl.6.1 should not be read as restraining the sale of ancillary products, and in particular the sale of ancillary products without any sale of coffee and tea. This was consistent with the attitude shown by the plaintiff, on becoming aware that ancillary products were being sold.

Decision

60 In my opinion, it is clear that "the Business" in the agreement whereby D-E purchased the business meant the whole business as conducted by E.H. Harris, including the dealing in ancillary products along with coffee and tea and, to a minor extent, independently. Plainly, the whole business was being purchased. The stock of ancillary products was being purchased. Eighteen percent of total sales was not insignificant, and on the evidence, I think it is clear that the dealing in ancillary products made some contribution to the goodwill of the business. The fact that the definition referred to "coffee and tea" and not other products does not in my opinion detract from that view, because that was a reasonable shorthand way of referring to the E.H. Harris business.

61 I accept that there is a change of wording when one comes to the definition of "the Business" in the service agreement. However, particularly where a draft of the service agreement was annexed to the sale agreement, it is plain that "the Business" in the service agreement, by which Phillip McClelland was to be employed pursuant to cl.2.1 of the sale agreement, was the business being purchased under the purchase agreement by D-E which was in turn to be licensed to the plaintiff (plus any other business designated by the plaintiff). In my opinion, the whole of the E.H. Harris business thus being purchased is fairly described by the words in the definition in the service agreement, that is, "the business of purchasing, processing, packaging and distributing coffee and tea". When one has regard to the relationship of the service agreement to the sale agreement, I do not think it would be appropriate to construe that definition narrowly, it might be as if it were purely a matter between employer and employee.

62 This approach does not mean that any sale of ancillary products in the food service market would necessarily be competitive with that business. However, it does mean that the business, in relation to which the question of competition arises, is not a business limited to dealing in coffee and tea and nothing else, but is rather the whole of the business as previously carried on by E.H. Harris, and subsequently carried on by the plaintiff.

63 In those circumstances, as I believe the plaintiff concedes, there is no basis for implying any term restricting competition.

RECTIFICATION

Submissions

64 The plaintiff's claim for rectification was pursued only if cl.6.1 was given a more limited operation than submitted by the plaintiff. Mr. Sullivan referred to Pukallus v. Cameron [1982] HCA 63; (1982) 180 CLR 447 at 452; Maralinga v. Major Enterprises [1973] HCA 23; (1973) 128 CLR 336 at 350; Slee v. Warke [1949] HCA 57; (1949) 86 CLR 271 at 280; and NSW Medical Defence Union v. Transport Industries Insurance Co. (1986) 6 NSWLR 740 at 753. He pointed to evidence of intention given by the plaintiff's representatives. He submitted that it should be inferred that Phillip McClelland had a similar intention.

Decision

65 Although my finding as to the construction of cl.6.1 may be slightly narrower than that sought by the plaintiff, in my opinion no case is made out for rectification. The evidence falls far short of showing a common continuing intention for any term wider than that which I have found.

REPUDIATION

Submissions

66 Mr. Sullivan submitted that repudiation occurs when a party evinces an intention no longer to be bound by the contract: Progressive Mailing House v. Tabali [1985] HCA 14; (1985) 157 CLR 17 at 33. The same principles apply to contracts of employment: Automatic Fire Sprinklers v. Watson [1946] HCA 25; (1946) 72 CLR 435, Turner v. Australian Coal & Shale Employees' Federation [1984] FCA 275; (1984) 55 ALR 635 at 647. The letter of 22nd June 1992 must be viewed in the light of two previous letters, those of 17th January 1992 and 26th May 1992. Those letters, which attempted to undermine the position of Mr. Rogers, a senior long-standing employee of D-E, without adopting the proper course for complaints, amounted to a deliberate attempt by Phillip McClelland to create a situation where his continued employment by the plaintiff was non-viable. The letter of 22nd June 1992 must also be viewed in the light of Phillip McClelland's conduct in seeking legal advice from Sly & Weigall on or about 19th June: his lack of recall about seeking such advice was, literally, incredible.

67 As for the letter itself, although it asked for termination, the remainder of the letter indicated that termination was a fate accompli. It expressed an unwillingness to stay beyond 26th September 1992. In several places, it assumed that there would be a termination of the employment. This is reinforced by the accompanying resignation from the Board of Directors. The letter was very reasonably taken as a resignation by D-E personnel. It was described as a resignation at the meeting on 23rd June, and Phillip McClelland did not demur to this description. This amounted to an admission by him that the letter truly was a resignation: Shaddock & Associates v. Parramatta City Council [1981] HCA 59; (1981) 150 CLR 225 at 230; Thomas v. Hollier [1984] HCA 35; (1984) 156 CLR 152; Davies v. Nyland (1975) 10 SASR 76 at 107; Dallhold Investments v. Gold Resources Australia (1991) 31 FCR 587 at 597. Mr Sullivan also referred to a letter from Phillip McClelland to a Mr. Douque dated 18th October 1993, which made it clear that he considered that he had made the decision to leave the plaintiff.

68 Accordingly, the Court ought to find that Phillip McClelland's conduct, and in particular his letter of 22nd June 1992, evinced the clearest intention not to be bound to perform the contract for the remainder of the three-year period, and hence was a repudiation.

69 Mr. Sullivan submitted that the plaintiff then accepted this repudiation: the plaintiff's conduct in allowing Mr. McClelland to continue physically working until 8th July 1992, and paying him three months' salary thereafter, did not detract from this: Western Excavating v. Sharp (1978) ICR 222 at 226. This was in conformity with the D-E policy to make such terminations of employment as "creditable" to both parties as possible.

70 Mr. Conti submitted that repudiation of a contract is a serious matter, not lightly found or inferred: Smyth & Co. v. Bailey (1940) 3 AllER 60 at 71; Grout v. Gunnedah Shire Council (1994) 126 ALR 355 at 370. Phillip McClelland appreciated he was subject to a service contract for an unexpired term of years, to which he was bound; and had sought legal advice from Sly & Weigall. The letter of 22nd June 1992 requested termination; and other parts of the letter, including a statement as to causing minimum disruption and an offer to stay until 26th September 1992, made it clear that the letter was seeking a negotiated end to the employment. This was confirmed by the expressed willingness to treat with the company, albeit preferably not with Mr. Rogers.

71 By its actions, the plaintiff indicated that it understood the letter in this way. Mr. Boonstra's facsimile referred to a company policy not to leave a manager in his responsibility after it has become clear that he is not performing or "is willing to leave". It was mutually agreed that he would remain at the plaintiff's offices until 8th July 1992, and then he was paid long service leave, holiday pay and salary up to that time, plus a further three months "termination pay". This conduct by the plaintiff was inconsistent with an acceptance of a repudiation. A significant incentive to the plaintiff entering into a consensual termination was that the plaintiff wished to have a continuing good relationship with other members of the McClelland family.

Decision

72 I have noted the submission on behalf of the plaintiff that Mr. McClelland's conduct, and in particular his letter of 22nd June 1992, evinced the clearest intention not to be bound to perform his contract. I should say at once that the plaintiff is limited by the pleadings to basing the allegation of repudiation on the letter of 22nd June 1992, and not on other conduct of Phillip McClelland. Early in the hearing, the defendants had sought to amend the Defence so as to allege that the plaintiff's conduct as employer amounted to a repudiation by the employer, which would have justified rescission by Phillip McClelland. Such application was opposed by the plaintiff, and rejected, on the basis that the plaintiff was not prepared for a hearing in which the merits of the conflict between Phillip McClelland and Mr. Rogers was investigated. In those circumstances, it is not open to the plaintiff to seek to bolster up a case of repudiation by the letter by calling in aid earlier conduct by Phillip McClelland. However, I do accept that the earlier conduct by Phillip McClelland is part of the background against which the letter of 22nd June 1992 must be considered and interpreted.

73 Apart from evidencing the serious dissatisfaction of Phillip McClelland with his dealings with Mr. Rogers, I do not think that the earlier letters bear very strongly on the construction of the letter of 22nd June 1992. It was put for the plaintiff that it was inappropriate conduct by Mr. McClelland to write these letters behind Mr. Rogers' back to his superiors in the organisation; but that is not relied on as repudiation, and it illustrates a consistency in Phillip McClelland's conduct between these two earlier letters, which on their face were seeking changes in the context of continued employment of Mr. McClelland, and the letter of 22nd June which is alleged to be repudiatory. It was said that the employer would more readily take the 22nd June letter as repudiatory, because Phillip McClelland had not made further enquiry as to the employer's response to the letter of 26th May, and had not allowed sufficient time for any further response. In circumstances where it is plain from evidence given by the plaintiff that no response favourable to Phillip McClelland was contemplated, it seems to me that Phillip McClelland cannot be criticised for correctly drawing this inference, and that the matter also has little bearing on the construction of the letter.

74 Similarly, it seems to me that the fact that Phillip McClelland took legal advice shortly before writing the letter cannot assist in the interpretation of the letter. It was not known to the plaintiff that this legal advice had been taken. One might draw the inference that, having taken legal advice, Phillip McClelland would have been careful to avoid repudiation; but the effect of the letter must be considered in the light of the circumstances known to both parties, rather than having regard to Phillip McClelland's subjective intentions.

75 For the plaintiff, considerable reliance was placed on the description of this letter as a "resignation". I accept that the ordinary meaning of the word "resign" in the context of an office, position, etc. is "to relinquish, surrender, give up, or hand over". However, its general use is to some extent equivocal, in that resignations notoriously are often tendered and not accepted, in which case the office or position is considered as continuing. That is, in many cases resignations are ineffective and known to be ineffective, unless they are accepted. Those resignations would be seen as the giving up of any claim to remain in the position or office, coupled with an offer to put an end to occupation of the position which might or might not be accepted. For that reason, although I am prepared to accept that the letter was described as a resignation at the meeting of 23rd June and that Phillip McClelland did not challenge that description, I do not think this carries very much weight concerning the question of whether the letter was or was not a repudiation.

76 Turning to the letter itself, I think it is fair to say that the letter made it clear in no uncertain terms that Phillip McClelland wished to leave the employment of the plaintiff, and that he believed that the very likely result of this letter was that he would in fact leave that employment. At the very least, the letter very strongly sought agreement from the plaintiff to the termination of the employment. The question is, did the letter convey that the writer would leave that employment, whether or not agreement was reached with the plaintiff. On the whole, I am not satisfied that it did. The words "I ask for the termination of my contract" point very strongly towards interpretation of the letter as a request for an agreement, not a repudiation. To some extent, later parts of the letter, which appear to treat the termination as something of a fait accompli, and the implication that Phillip McClelland was not prepared to stay beyond 26th September 1992, point the other way. However, I do not think that these indications are strong enough to overcome the force of the earlier words. At the very best, they make the letter equivocal, and I do not think repudiation should be inferred from an equivocal letter.

77 Furthermore, I do not think the plaintiff treated the letter as a repudiation, and acted to accept it as a repudiation. For acceptance of a repudiation to occur, there must in my opinion be conduct by the innocent party conveying to the repudiating party that the innocent party is thereby treating the contract as at an end. Normally, to call on the repudiating party for any further performance of the contract would be an affirmation; although, if the intention to treat the contract as at an end is clear, and the further performance is in the circumstances insubstantial, affirmation may be avoided.

78 There has been some discussion of this issue in the context of repudiation by an employer, with the employee continuing in employment for a short time thereafter.

79 In Western Excavating (ECC) v. Sharp (1978) ICR 222 at 226, Lord Denning, MR said this:

If the employer is guilty of conduct which is a significant breach going to the root of the contract of employment, or 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.

It will be seen that Lord Denning did not regard continued working by an employee during the period of notice as being an affirmation.

80 In Bashir v. Brillo Manufacturing Co. (1979) IRLR 296, 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 months period.

81 Again, in W.E. Cox Toner (International) v. Crook (1981) ICR 823, a long delay in acceptance of a repudiation by an employee was held to have affirmed the contract. In that case, Brown-Wilkinson, J., giving the judgment of the Employment Appeal Tribunal, noted the difficult position of an employee faced with a repudiation by an employer: by continuing to work for any period of time, the employee risks affirming the contract. The judgment went on, at p.829, to note 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".

82 In the present case, in my opinion the plaintiff by its conduct manifested an intention to have a consensual ending of the agreement, in a manner "creditible" to both parties, and not to terminate the agreement for breach by Phillip McClelland. This intention was manifested by the arrangement that the employment continue until 8th July 1992, and by the payment of three months' "termination pay". This conduct, in my opinion, shows that the plaintiff did not take the letter as a repudiation; and in any event, shows that the termination which was effected was consensual and not termination for breach.

DURATION OF RESTRAINT

Submissions

83 Mr. Sullivan submitted that, if the contract was terminated for repudiation, the plaintiff was entitled to be put in the position it would have been in had that repudiation not occurred; that is, the plaintiff would have enjoyed a period of at least until November 1995 before Phillip McClelland could set up a competing business.

84 Alternatively, it was submitted that the contract of employment came to an end on 8th October 1992, so that the restraint against competition continued until 8th October 1993. (Because the plaintiff's pleading had alleged a restraint only until 26th September 1993, it was accepted that the plaintiff could not succeed beyond that date.) It was submitted that Phillip McClelland had requested termination, but indicated he was prepared to stay until 26th September 1992; that the plaintiff in substance accepted the offer to remain employed until 26th September but relieved Phillip McClelland from his obligation to work in that period other than up to 8th July 1992; and that accordingly, the contract came to an end on 8th October 1992, being the date until which salary was paid, albeit performance had been excused after 8th July 1992: see Csomore v. Public Service Board of NSW (1987) 10 NSWLR 587 at 595; Mason Gray Strange NSW v. Eisdell, Powell, J., Supreme Court of NSW, 22/2/89.

85 Mr. Conti submitted that the conduct of both parties manifested an intention that the employment terminate on 8th July 1993. The employment came to an end on that day, and accordingly so did the contract of employment: see APESMA v. Skilled Engineering (1992) 12 ALR 471. Alternatively, where payment is made in lieu of notice, in the absence of evidence of a contrary intention, it should be inferred that the employer intended the termination to take effect immediately: Siagian v. Sanel (1994) 122 ALR 333.

Decision

86 In circumstances where I have found that the contract was not terminated for repudiation, I need not consider in any detail whether the plaintiff would in such case be entitled to damages on the basis that it would have had a restraint operative until November 1995. In general terms, I accept that a party in that situation is entitled to damages calculated with reference to the position it would have been in had the other party performed the contract. However, exactly how this would work out in this situation, I need not discuss.

87 Treating the termination as consensual, it seems to me that the intention manifested by the parties was that the employment should come to an end on 8th July 1992. The objective conduct of the employer was to pay ordinary salary, holiday pay and long service leave entitlements calculated until that day, and to pay in addition three months' "termination pay". The objective conduct of the employee was to accept those payments and to cease attending at the employer's premises after that date.

88 Certainly, circumstances may occur where the contract is treated as coming to an end after a period of notice, and the employer waives what would otherwise have been the continuing obligation of employee to perform services: that is what was considered to have happened in the Mason Gray Strange case. However, it seems to me that the question is what intention is manifested in the particular case. In this case, as I have said, I think the intention manifested by both parties was that the employment cease on 8th July. In Sirgian v. Sanel, Wilcox, CJ held that where payment in lieu of notice is made, in the absence of evidence of a contrary intention, it should be inferred that the employer intended the termination to take effect immediately. Whether or not there is any presumption to similar effect applicable in circumstances such as the present, in my opinion that was the intention manifested in this case.

89 For the plaintiff, some reliance was placed on the offer by Phillip McClelland to continue to work until 26th September 1992. That offer was not accepted, and I do not think the fact that offer was made effects the questions of what intention was manifested by the actions of the parties.

DID PHILLIP McCLELLAND COMMIT BREACHES OF CONTRACT?

Submissions

90 Mr. Sullivan submitted that the evidence showed that by July 1992 at the latest, Phillip McClelland had decided to establish a business to compete with the plaintiff's business in respect of the sale of coffee and tea and ancillary products in the food services market. In furtherance of this plan, he devised a strategy which included the following elements: to target existing customers of the plaintiff; initially to seek to sell only ancillary products to these customers; to do so as a short-term measure, in order to advance the ultimate business of selling coffee and tea, the selling of ancillary products on their own not being financially viable; and to engage key personnel of the plaintiff who had valuable contacts.

91 In pursuit of these plans, he had commenced carrying on a business by November 1992. That business was properly characterised from November 1992 as one of purchasing, processing, packaging, and distributing coffee and tea. The breaches were not de minimis: see Acros v. E.A. Ronaason & Son [1933] UKHL 1; (1933) AC 470 at 480; Shipton Anderson & Co. v. Wheil Bros. & Co. (1912) 1 KB 574. Furthermore, what was done went far beyond being merely preparatory to carrying on business in competition with the plaintiff: see Southern Estates v. FCT [1967] HCA 16; (1967) 117 CLR 481 at 494.

92 Mr. Conti submitted that Phillip McClelland's activities prior to 8th April 1993 did not extend to the proscribed coffee and tea activities. In any event, what was done was no more than to engage in preparatory acts, not to carry on a business in competition: see Pioneer Concrete Services v. Galli (1985) VR 675. Furthermore, it was wholly unrealistic to characterise the very minor sales made by Phillip McClelland as being in competition was a massive multi-national corporation. The plaintiff did not see his activities as being competitive. No claim for damages is made in respect of any pre-9th July 1993 activities. No damage to goodwill is alleged as flowing from those activities. Mr. Conti submitted that tax cases, such as Southern Estates, went to a different issue.

Decision

93 There are some disputed questions of fact which I need to look at in relation to this issue.

94 First, it was submitted for the plaintiff that I should infer that Phillip McClelland was soliciting customers of the plaintiff in respect of tea and coffee business prior to 8th July 1993. It was submitted that this inference arises from the Westpac credit proposal dated 15th September 1993, and Mr. McClelland's answers in cross-examination to questions about it. On the whole, I do not think I can draw the inference from that document or those answers that the sale of coffee and tea was actually discussed by Phillip McClelland with customers of the plaintiff prior to 8th July 1993. Quite plainly, coffee and tea had been discussed with customers between 9th July 1993 and 15th September 1993, and other matters had been discussed with customers prior to 9th July 1993. It may well be that prior to 9th July 1993 customers had approached Phillip McClelland expressing dissatisfaction with service provided by the plaintiff. I do not think the terms of the entry, the basis of which is not established with clarity, are sufficient to enable me to reject Mr. McClelland's claim that he was careful prior to 9th July 1993 not to discuss coffee and tea with customers of the plaintiff.

95 The other factual matter concerns the content of discussions entered into by Phillip McClelland, and more especially Mr. Holder, with employees of the plaintiff, prior to 9th July 1993. Those persons admitted that there had been discussions with employees of the plaintiff, but claimed that the discussions occurred on the initiative of the employees, and involved expressions of dissatisfaction by the employees with their employment with the plaintiff, and no more than indications from Mr. McClelland or Mr. Holder that there could possibly be a job for them after 8th July 1993. However, Mr. Clark, who managed the plaintiff's business in Cairns until July 1993, and who commenced employment with Ambassador Foods at about the end of August 1993, gave evidence to the effect that he was approached and solicited by Mr. Holder and Mr. McClelland prior to July 1993, and offered an employment package which he could take up after 8th July 1993. In addition, the plaintiff placed reliance on the placing of advertisements, in circumstances where all positions were in fact filled by employees or ex-employees of the plaintiff, with whom there had been previous contact: it was submitted that this, coupled with the obtaining of statutory declarations, supported an inference that Phillip McClelland was trying to hide the reality of his approaches to the plaintiff's employees.

96 In my opinion, I cannot rely on the details of Mr. Clark's evidence. His affidavit was made in circumstances where he had recently been dismissed by Ambassador Foods for alleged misconduct, whereupon he immediately contacted the plaintiff seeking employment, and indicating preparedness to make a statement about the activities of Phillip McClelland and Ambassador Foods. That statement and the affidavit were made shortly afterwards, and subsequently Mr. Clark was given employment by the plaintiff. In those circumstances, I must regard Mr. Clark as a partisan witness. Furthermore, on his own evidence, he was prepared to solemnly make a false statutory declaration as to the circumstances of his obtaining employment with Ambassador Foods. I also considered that Mr. Clark, in his evidence, sought to greatly underplay his own dissatisfaction with his employment by the plaintiff and the extent to which he was actively seeking employment by Ambassador Foods. As regards the advertisements and statutory declarations, these may fairly be regarded as window-dressing; but this window-dressing was undertaken on legal advice, and I do not infer that the object was to conceal something sinister.

97 Accordingly, while I am not affirmatively satisfied that there was no more to the contacts between Phillip McClelland and Mr. Holder on the one hand, and employees of the plaintiff on the other, than those persons claim, I am not affirmatively satisfied that their dealings with Mr. Clark were as Mr. Clark claims. Probably, the truth lies somewhere in between these two accounts.

98 As submitted by Mr. Sullivan, Phillip McClelland had probably commenced business through Ambassador Foods by November 1992, and certainly he had done so by the beginning of February 1993. The question is, was this business "competitive" with the plaintiff's business as defined in the service agreement? In my opinion, this is not the same question as whether Ambassador Food's business prior to 8th July 1993 could be described as a "business of purchasing, processing, packaging and distributing coffee and tea".

99 If one confined attention to the sale of relatively small amounts of UHT milk, jam and cookies to customers of the plaintiff in the food service industry, the question may not have a clear-cut answer: the intersection with the plaintiff's business might be thought too insubstantial to amount to competition. However, so to confine attention would in my opinion be an incorrect approach. It is plain that these business activities were undertaken in preparation for a coffee and tea business to commence after 8th July 1993, and in order to give an advantage in the conduct of that business, particularly through the maintenance of business contacts with customers of the plaintiff. Furthermore, during the period February to July 1993, contact was also being maintained with certain key employees of the plaintiff, with a view to the possible employment of those persons in a coffee and tea business after 8th July 1993. When one puts all those elements together, it seems to me that, despite the relatively small quantities of products sold, and despite the entire absence from these products of coffee and tea, the business of Ambassador Foods during that period can correctly be regarded as being competitive with the plaintiff's business, that business being as I have determined earlier in this judgment. In my opinion, it went beyond being mere preparation for later competition.

DID MR. BANKS BREACH HIS CONTRACT OF EMPLOYMENT?

Submissions

100 It was submitted by Mr. Sullivan that I should accept the evidence of Mr. Hobbs that on 19th August 1993 he heard Mr. Banks introducing Mr. Bellchambers to the Food & Beverage Manager and the Catering Manager at the Hyatt Hotel, Coolum, Queensland, which was a customer of the plaintiff, and that he heard Mr. Bellchambers say words to the effect that Mr. Banks was joining McClellands and that they would come back and see them after he had done so. He submitted that this evidence should be preferred over Banks' denial of any such conversation and of knowledge that Mr. Bellchambers was about to be employed by Ambassador Foods; and that it should be inferred that Mr. Banks took Mr. Bellchambers along in order to promote the business of Ambassador Foods, which he was shortly to join. He submitted that I should reject Mr. Banks' evidence that he simply took Mr. Bellchambers, who was then unemployed, along because he thought he would like a drive and to see some of his old customers. Mr. Sullivan submitted that this conclusion was also supported by evidence from Mr. Hill, and a document of 30th August 1993 recording employment of Mr. Banks, this being inconsistent with Mr. Banks' evidence that he was not offered a job until after 1st September 1993.

101 Mr. Sullivan submitted that such conduct by Mr. Banks was a breach of fidelity and good faith to his employer: see Blyth Chemicals v. Bushnell [1933] HCA 8; (1933) 49 CLR 66 at 81; Wessex Dairies v. Smith (1935) 2 KB 80 at 84.

102 Mr. Conti submitted that I should accept the evidence of Mr. Banks and Mr. Bellchambers.

Decision

103 On the balance of probabilities, for the reasons advanced by Mr. Sullivan, I find that Mr. Banks did take Mr. Bellchambers to the Hyatt at Coolum for the purpose of advancing the interests of Ambassador Foods. That was a breach of his contract of employment, although as conceded for the plaintiff, not one which resulted in any damage being caused to the plaintiff.

LIABILITY OF FIRST AND SECOND DEFENDANTS

Submisions

104 Mr. Sullivan submitted that a knowing and intentional interference by the first and second defendants with the plaintiff's contractual rights without justification was an actionable tort, if the interference causes damage to the plaintiff: Davies v. Nyland (1975) 10 SASR 76 at 98; D.C. Thompson & Co. v. Deakin (1952) Ch. 646 at 694. Any active step taken by a defendant, having knowledge of the contract, by which he facilitates a breach is sufficient: British Motor Trade Association v. Salvadori (1949) Ch. 556 at 565. So far as knowledge was concerned, it was sufficient that the defendant had sufficient knowledge of the contract to know that it was hindering or preventing its performance: J.T. Stratford & Son v. Lindley (1965) AC 269; Greig v. Insole (1978) 3 AllER 449; Boral Bricks (NSW) v. Frost (1987) ATR 80-097 at 68,608; Woolley v. Dunford (1972) 3 SASR 243 at 270; Emerald Construction Co. v. Lowthian (1966) 1 WLR 691. In the present case, the first and second defendants were the alter ego of Phillip McClelland, and must be taken to have known what he knew. He knew that it was a breach by him of contract for a company with which he was associated to carry on a competitive business; and accordingly so did the first and second defendants.

Decision

105 In my opinion, the elements of this tort are made out against Ambassador Foods, if not the first defendant, except for the requirement of knowledge that the plaintiff's contractual rights were being interfered with. In my view, the cases referred to by Mr. Sullivan show that the relevant question is whether the defendants had sufficient knowledge of the contract to know that they were hindering or preventing its performance: see Woolley v. Dunford at 270. I am not affirmatively satisfied that Phillip McClelland knew or believed that he was acting in breach of contract: he had sought legal advice, and I think that, on the basis of that advice, he believed he was not breaching his contract. I have taken a view different from that legal advice, whether because I have acted on more complete material than was supplied to Mr. McClelland's solicitors or have come to a different view as to the correct application of the law; but that does not alter the fact that Mr. McClelland had legal advice and was apparently acting in accordance with it. That, of course, does not prevent his actions being in breach of contract; but I think it is sufficient to prevent the actions of his companies from being intentional interference with the contract.

106 For that reason, I do not think the plaintiff is entitled to succeed against those defendants.

LIABILITY OF MR. HOLDER

107 In my opinion, much the same considerations apply to Mr. Holder. I am not satisfied that he knew or believed that what was being done was a breach of Mr. McClelland's contract. In those circumstances, I do not think he is liable for the tort of intentional interference with that contract.

DAMAGES

Submissions

108 Mr. Sullivan submitted that the plaintiff should be awarded that amount which would put it in the position it would have been had Mr. McClelland not breached the contract: Gates v. City Mutual [1986] HCA 3; (1986) 160 CLR 1 at 11-12; Commonwealth v. Amann Aviation [1991] HCA 54; (1991) 174 CLR 64 at 80-83. He submitted that the plaintiff was entitled to damages as calculated in a report of Mr. Bryant obtaining a calculation of profit lost by the plaintiff up to 31st March 1996 of just under $2.9 million. The date was selected by adding four months to the date of November 1995 arrived at assuming repudiation, this four months being a springboard period: see United States Surgical Corporation v. Hospital Products International (1982) 2 NSWLR 766 at 815. There should be no discount for the chance that sales would have been lost in any event; however, if the Court considered there was such a chance, then there should be a reduction by the percentage attributed to that chance: Malec v. J.C. Hutton [1990] HCA 20; (1990) 169 CLR 638 at 643; Minister for Immigration & Ethnic Affairs v. Liang [1996] HCA 6; (1996) 185 CLR 259 at 277-8; Commonwealth v. Amann Aviation [1991] HCA 54; (1991) 174 CLR 64 at 95-8.

109 Additionally, the plaintiff was entitled to the costs of recruitment, relocation and training involved in replacing the staff who left the plaintiff to go to Ambassador Foods.

110 Mr. Conti submitted that it had not been shown that, but for the activities of Mr. McClelland, the customers claimed to be lost would have stayed with the plaintiff. The business was a highly competitive one. It appeared that by May 1992, the plaintiff was already losing substantial business. Its largest customer Ansett was lost to a competitor, Robert Timms, this occurring gradually after July 1992 and being complete by January 1994. There was no specific contract which the plaintiff could show it would have had, as was the case in Amann Aviation.

Decision

111 The hearing was conducted before me on the basis that I would determine the principles on which damages should be assessed, but not quantify the damages themselves.

112 In order to assess damages, it is necessary to ask what would have happened, but for Phillip McClelland's breach of contract. Since the breach which I have found is the breach of conducting a business competitive with the plaintiff's business up to 8th July 1993, and not the repudiatory breach claimed by the plaintiff, it is clear that damages must be calculated on a far more limited basis than that contemplated by Mr. Banks' report. No case has been made out that, but for the breach which I have found, Phillip McClelland would not have competed with the plaintiff's business from 9th July 1993, as I have held he was entitled to do. No finding has been sought, and I could not make a finding, that he would not have gone into business as from that date, on the same scale as he actually did, and using the same resources and much the same personnel. Had it not been for the conduct of the business of selling ancillary products, and in particular selling them to customers of the plaintiff, I would not have regarded such contacts with the plaintiff's employees as have been proved as being breaches of Phillip McClelland's contract, so there seems to me to be no basis for saying that these people would not have left the plaintiff and joined Mr. McClelland in any event. I am satisfied on the evidence that they were most dissatisfied with their employment by the plaintiff, and were very willing to join Mr. McClelland. At the very best, one might say there was a very small chance that these things would not have happened.

113 However, I accept that the breaches which did occur through the sale of ancillary products, in particular to customers of the plaintiff, did give Mr. McClelland and Ambassador an advantage (and the plaintiff a corresponding disadvantage) when they commenced selling coffee and tea products after 8th July 1993. It is very difficult to quantify the disadvantage caused to the plaintiff. In substance, Ambassador had been conducting business, which I have found to be in breach of the covenant, for at least five months prior to 8th July 1993. Because of the very limited nature of that business, and the complete absence of coffee and tea products, this cannot be regarded as giving a five month advantage to Mr. McClelland and his companies as at 8th July 1993. At one stage, I thought that the Armory v. Delamirie principle might apply, so that the difficulties of calculation brought about by Mr. McClelland's breach of contract should not operate at all to the disadvantage of the plaintiff. However, on reflection that principle really only applies with full force where there is a difficulty caused by failure to give evidence which could have been given, along the lines of the Jones v. Dunkel principle, rather than problems of calculation because of the fact situation brought about by the defendants' conduct. I think the correct approach is to hold that the onus lies on the plaintiff to prove loss, but that in circumstances where substantial loss is proved, but is very difficult to quantify, the Court has to do its best; and where the difficulty of calculation is brought about by the defendant's conduct, the Court should try to ensure that this does not unfairly disadvantage the plaintiff.

114 Plainly, it would be wrong to limit the plaintiff to damages caused up to 8th July 1993, or for the first few months after 8th July 1993, by Ambassador's competition. Doing the best I can, I consider that Mr. McClelland and Ambassador have in substance put themselves in the position they would have been in if Mr. McClelland had been bound by a covenant only for about nine or ten months, rather than the full twelve months. The result is as if the plaintiff had faced full competition commencing two to three months earlier than it would have, if the covenant had been complied with. One way of looking at this would be to say that the plaintiff should be put in the position it would have been in if every loss caused by competition from Ambassador Foods had happened about two or three months later than it actually did. Another approach would be to chose a two or three month period at a time when Ambassador's sales were in full flight, to assess the plaintiff's loss of profits due to competition from Ambassador during that period of two or three months, and to add to this damages on the basis that losses caused by competition with Ambassador up to that time would all have occurred two or three months later than they actually did.

115 I think the best way to give effect to this general approach, without causing too much difficulty of calculation and without unfairness to either party, would be to select a three-month period about two or three years after 8th July 1993, and to ascertain the total sales made by Ambassador during that period to customers who had been customers of the plaintiff. A gross profit on those sales could then be calculated on the plaintiff's margins, and a further figure deducted to allow for additional overheads that would have been caused by those additional sales. That calculation would leave out of account the delay in competition that would have occurred up to that period, alleged lower prices caused by Ambassador's competition, the chance that the plaintiff would have made sales to other customers of Ambassador, and any chance that competition would not have occurred in much the same way as it did. Those matters I would consider to be balanced by the selection of three months rather than two months as the relevant period. Interest would then be awarded as from the end of that three month period. No damages would be awarded for the cost of employing new staff, because on this approach that would have occurred in any event, although albeit perhaps slightly later.

EXEMPLARY DAMAGES

Submissions

116 Mr. Sullivan submitted that, since the claim against the first and second defendants was in tort, it was open to the Court to award exemplary damages: see XL Petroleum (NSW) v. Caltex Oil (Australia) (1985) 155 CLR 487 at 471; Lamb v. Cotogno [1987] HCA 47; (1987) 164 CLR 1 at 9-10. Mr. Sullivan submitted that exemplary damages could also be awarded in cases of contract: see Friel, The Law of Contract (1995) at 306-7; Tilbury, Civil Remedies, Vol.1, par.5009; Paragon Properties v. Magna Investments (1972) 24 DLR 3(d) 156 at 167. The conduct of the first and second defendants and of Phillip McClelland showed a contumelious disregard for the plaintiff's rights. The breach of contract, participated in by the first and second defendants, was deliberately designed or calculated to cause maximum harm to the plaintiff. The plaintiff's customers were targeted, and key employees of the plaintiff enticed away.

Decision

117 As stated earlier, I am not satisfied that Phillip McClelland, and thus the first and second defendants, knew or believed that their conduct was in breach of Phillip McClelland's obligations under his contracts. In those circumstances, the claim for exemplary damages must fail.

CONCLUSION

118 The result is that the plaintiff will be entitled to damages against Phillip McClelland, on the basis discussed above, and nominal damages against Mr. Banks, but fails on all other claims. I think it would be appropriate to postpone determination of any question of costs until the damages have been quantified: I think it is possible that the quantum of damages will have some bearing on the question of costs.

************

I certify this and the preceding 44

pages to be a true copy of the reasons

for judgment of Justice D.H. Hodgson

· Date 2nd March 1999

· Associate

LAST UPDATED: 02/03/1999