The NSW Supreme Court has ordered an employer, that was not a party to a post-employment restraint case, to pay legal costs.

HRX Pty Ltd v Scott [2013] NSWSC 451

Stuart Scott worked in human resources in Perth. He left employment with HRX Pty Ltd to work for a direct competitor, Talent2 Pty Ltd.

Mr Scott’s employment contract with HRX contained a post-employment restraint clause, preventing him from soliciting HRX’s clients and from working in a competitor’s business for a certain period. After resigning from HRX in January 2012, in April 2012 Mr Scott commenced working for Talent2.

July 2012: Allegations of breaches of post-employment restraints emerge

During July 2012 HRX became aware that Mr Scott was working for Talent2 and instructed its lawyers to write to Talent2 seeking undertakings that Talent2 would not “permit, assist or counsel the defendant to perform work in any capacity for it prior to 31 January 2013”.

Talent2, after receiving this correspondence, asked Mr Scott whether he had a post-employment restraint clause in his prior contract with HRX. Mr Scott said that his only possible breach of his post-employment restraint was working for Talent2. He also claimed that the post-employment restraint in his HRX employment contract was only for six months, which by July 2012, had no further effect. He said that he could not contribute financially to defending any litigation against him.

Talent2 decided that it would fund the defence of any litigation against Mr Scott for breach of his post-employment restraint. This funding arrangement was informal and no conditions were attached to it.

Later that month it became apparent to Talent2 that the post-employment restraint was in fact for 12 months, not six. It also came out that Mr Scott had taken a USB from HRX which contained proposals and HRX client information. Mr Scott claimed he had deleted the information and had not used it. Lawyers were retained for the purposes of preparing to defend any litigation.

August 2012: Litigation Commences

In August 2012 HRX issued a summons against Mr Scott, but did not join Talent2 as a party. At this point, lawyers were being instructed directly by Mr Scott, but Talent2 was being kept updated about the case. Bills were sent directly to Mr Scott, but were paid by Talent2.

By late August, it became clear to Talent2 that Mr Scott was in breach of his postemployment restraint with HRX as he had contacted former clients while working for Talent2. Talent2 informed him that they would no longer fund his defence. Mr Scott revealed to Talent2 that he “tried to stay away from prior clients but clearly not enough”. While he had originally claimed that he had not used any confidential HRX information while working for Talent2, this was untrue. He resigned from employment with Talent2 and settled his dispute with HRX shortly after.

Consent orders were filed with the Court requiring Mr Scott to not compete with HRX or solicit HRX clients for 12 months from 31 January 2012. Mr Scott was also required under the consent orders to deliver up HRX confidential information and provide an affidavit identifying the confidential information that he accessed, to whom it was provided, its location and how it was used. The costs of the litigation were reserved.

February 2013: Costs Ordered Against Talent2

HRX then sought an order that Talent2, who was not a party to the litigation, pay its costs of the litigation against Mr Scott. It is only in rare circumstances that a party can ask a court to order that a non-party pay their legal costs. The factors that the court took into account in deciding whether to order a non-party to pay legal costs included:

  • ‡The non-party played an active part in the conduct of the litigation.
  • ‡The non-party funded the litigation.
  • The non-party had been the cause of the proceedings in that the proceedings would not have been undertaken had it not been for the non-party’s intervention.
  • ‡The unsuccessful party to the litigation (Mr Scott) was a “man of straw”.
  • ‡‡The non-party had a substantial interest (not necessarily financial) in the litigation.

Chief Justice Bergin ordered Talent2 to pay the legal costs of HRX, because Mr Scott would not have attempted to defend the claim but for the intervention and funding from Talent2.

Chief Justice Bergin highlighted the fact that Talent2 employed Mr Scott for three months (from April to July 2012) without making any inquiries into whether his conduct when employed by Talent2 breached any post-employment restraint clause. Inquiries were only made by Talent2 after there was a possibility of litigation commencing.

She said that “it is incumbent upon employers who effectively poach their competitors’ employees to ensure that those employees are not acting in breach of their obligations to their former employers, particularly where the consequences of such breach is a benefit to the new employer”.

The Chief Justice further highlighted that where employers fund litigation in circumstances where there are breaches of post-employment restraints, they may risk being subject to a non-party costs order.

Lessons for Employers: When hiring a new employee, employers need to keep in mind the following:

  • ‡‡Employers should make inquiries before they hire an employee to determine whether they are bound by a postemployment restraint.
  • Employer’s should also have employees warrant (for instance in their employment contract) that they have disclosed any post-employment restraints, and that they are not otherwise prevented from commencing work due to the imposition of any restraint.
  • ‡‡Funding the defence of an employee’s litigation should be done with extreme caution, and only where the employer is certain that the employee has been honest about their conduct and the nature of their post-employment restraint. Employers should also think about retaining the option to withdraw assistance where it finds out the employee has been less than honest (and seeking an indemnity from the employee).

If an employer does not make necessary inquiries and funds an employee’s defence unconditionally, they run the risk of being held liable for the former employer’s legal costs (and in some circumstances, may also find themselves liable for other conduct of the employee).‡