In a highly unusual decision, the New South Wales Supreme Court recently imposed costs on a company that was not a party to the proceedings but which funded a defence to a restraint of trade case.
Stuart Scott was employed by HRX Pty Ltd (HRX) under a contract of employment that contained a 12-month post-employment restraint clause (Restraint Clause), which prevented Mr Scott from soliciting HRX’s clients and from working in a competitor’s business.
Talent2 Pty Ltd (Talent2) is a direct competitor of HRX. Mr Scott commenced employment with Talent2 in April 2012, which was during the restraint period. When Talent2 poached and employed Mr Scott, it was unaware that he was bound by the Restraint Clause.
In July 2012, HRX became aware that Mr Scott had commenced employment with Talent2 and threatened to commence restraint of trade proceedings against Mr Scott. Talent2 asked Mr Scott if he had breached any terms of his employment contract with HRX. Mr Scott advised Talent2 that he had not taken any HRX intellectual property and that he had signed a contract with a six-month restraint period.
At the end of July 2012, Talent2 became aware that Mr Scott had signed a contract with a 12-month restraint clause. Mr Scott also admitted to Talent2 that before leaving HRX, he had emailed himself spread sheets and taken a USB drive containing a number of documents. Mr Scott said that he had not used the spreadsheets or documents since he commenced employment with Talent2 and had subsequently deleted them.
In August 2012, HRX commenced proceedings against Mr Scott for breach of his Restraint Clause. Talent2 knew that Mr Scott could not afford to defend the litigation and it initially backed Mr Scott to fund his defence as it believed he had a strong case.
On 22 August 2012, after further evidence had been discovered,Talent2 informed Mr Scott that it could no longer support him legally in his defence as it had formed the view that he had actually breached the Restraint Clause. Mr Scott ultimately resigned at the risk of being dismissed.
Chief Justice Bergin found that Talent2 had funded Mr Scott’s defence “because of the benefits that would flow to it if it were successfully defended” and therefore ordered Talent2 to pay HRX’s costs in the proceedings. Her Honour said that when a new employer funds litigation brought by the former employer against its new employee in circumstances where there is a breach of an obligation to the former employer, the new employer may be at risk of a costs order being made against them.
Her Honour held that while an award of costs against a non-party should be awarded sparingly, such an order was justified in this case. Talent2 had employed Mr Scott for three months “without apparently making inquiries into his conduct that it made once litigation was threatened” and it knew by August 2012 that he had breached the Restraint Clause by forwarding information to his email account.
Bottom line for employers
While it is rare for a court to grant this type of order and this decision needs to be read in the context in which it was decided, employers who engage employees from a competitor should ensure that those employees are not acting in breach of their obligations to the former employer. This is particularly so if an employer stands to benefit from the breach.
Employers should check with a future employee before employing them whether they are bound by any restraint clauses. They should also request a copy of any contract or document containing the restraint.