The new employer as a non-party was ordered to pay the costs of proceedings between their employee and his former employer, HRX, concerning a restraint of trade in the NSW Supreme Court case of HRX Pty Ltd v Scott [2013] NSWSC 451.

Background

Mr Scott was employed by HRX pursuant to a contract of employment that contained restraints of trade that prohibited him from soliciting HRX’s clients and from working in a competitor’s business for 12 months.  During the restraint period, Mr Scott commenced employment with Talent2, a competitor of HRX in the recruitment industry, in breach of his restraint.  After Mr Scott declined to provide undertakings sought by HRX, HRX commenced proceedings against Mr Scott seeking to restrain him from working in competition with HRX and from soliciting its customers. 

Initially, Talent 2 funded the costs of Mr Scott’s defence “because of the benefits that would flow to it if [the litigation was] successfully defended” and on the basis that Mr Scott had informed it that his restraints only lasted for 6 months and that he had not breached those restraints other than by working for Talent2.  Talent 2 subsequently became aware that Mr Scott was subject to a 12 month restraint period and he conceded that he had taken some confidential information from HRX (although said he had not used it).  When Talent2 realised that Mr Scott had in fact breached his restraints in relation to client solicitation and confidential information, it ceased to fund Mr Scott’s defence.  As a result, Mr Scott resigned from Talent2 and agreed to submit to the majority of the orders being sought by HRX. 

HRX subsequently sought an order for Talent2 to pay its costs of the proceedings, on the basis that Talent2 had funded Mr Scott’s unsuccessful defence.

Decision

The Court has the power to determine who pays the costs of any proceedings and the amount of costs to be paid.  The Court identified factors for consideration in determining whether an order should be made that a non-party pay the costs of the proceedings, including the following; that the non-party played an active part in the conduct of litigation; that the non-party funded the litigation; that the non-party had been the cause of the proceedings in that such proceedings would not have been undertaken had it not been for the non-party’s intervention; that the unsuccessful party to the litigation is a “man of straw”; and that the non-party, or its principal, had a substantial interest (not necessarily financial) in the litigation.

Bergin CJ ordered Talent2 to pay HRX’s costs in its proceedings against Mr Scott for the following reasons:

  • Talent2 was aware that Mr Scott was unable to fund any proceedings against him and it was likely that Mr Scott would have “capitulated at the outset” if Talent2 had not funded the cost of the litigation against him.  Bergin CJ was satisfied that “but for the funding by Talent2, the litigation would not have been necessary”;
  • Although Mr Scott’s solicitors took instructions directly from him, Talent2 was involved in the conduct of the litigation because it needed to obtain information about whether to continue supporting and funding the litigation.  Therefore, the “strategy that was adopted in the litigation was significantly influenced by Talent2’s willingness to remain financially involved in the litigation”;
  • While Mr Scott would have benefited personally from successfully defending the litigation by retaining his job, Talent2 conceded and Bergin CJ found that Talent2 also derived and stood to derive a commercial benefit from funding Mr Scott’s defence because it employed and wished to continue to employ Mr Scott, who was an experienced recruitment employee in the WA market.  Further, it signified to HRX that Talent2 would “stand up to” litigation commenced by HRX.  Finally, Talent2 ceased to support and fund the litigation when it realised there was no longer any benefit to Talent2 in keeping Mr Scott employed;
  • Bergin CJ found that HRX would have been successful against Mr Scott if the trial had proceeded, particularly in relation to the non-solicitation of HRX’s customers and therefore was satisfied that HRX would have been entitled to an order that Mr Scott pay its costs (although this was not sought by HRX); and
  • Talent2 had employed Mr Scott for 3 months “without apparently making the inquiries into his conduct that it made once the litigation was threatened”.  However, Bergin CJ 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 consequence of such breach is a benefit to the new employer”

Implications

The making of an order of costs against a non-party is not a common event.  However, this case does highlight that it can occur and some practical steps that employers should consider when engaging an employee who has previously been engaged by a competitor.  These practical steps include the following:

  • Ensure that the terms of any post employment restraints that may apply to the proposed employment are clearly understood together with their scope of operation;
  • Ensure that appropriate directions and processes are put in place so that it is clear the employer will not condone the taking or use of any confidential information of the former employer or any other breaches of enforceable restraints of trade; and
  • Understanding that where arrangements are entered into by the employer for funding litigation on behalf of the new or proposed employee, these can form part of the circumstances which will give rise to an adverse costs order being made against the employer as a non-party, in circumstances where there is litigation and that litigation is not successful.