When an innocent party is faced with an apparent breach of contract, there are always two questions to ask. The first question is, “how strong is my argument that what has happened is, in, fact, a breach of contract?” The second question, which is often more important, is “can I obtain a remedy which will repair that breach?” In answering the second question, it is always worth keeping in mind that there’s only one thing better than recovering a big damages award to compensate you for loss suffered – namely, not suffering the loss in the first place.
When these questions are asked in the context of an apparent breach by a former employee of a post-employment restraint in an employment contract, not suffering the loss in the first place will usually require an injunction. To obtain an injunction to prevent a former employee diverting business from the old employer, it will be necessary to show that damages are not an adequate remedy – and damages, in turn, are usually measured by the loss of profits which would have been made from that business. So, does that mean that a non-profit organisation cannot restrain a former employee because a non-profit organisation does not wish to make profits and has no profits to lose? The Supreme Court of New South Wales has recently answered this question in the negative, in a decision which provides a number of useful lessons about injunctions generally and post-employment restraints specifically.
LiveBetter Services Limited (LiveBetter) is a charity which, amongst other things, provides supported independent living services under the NDIS. Up until 13 December 2019, LiveBetter employed one Mr Quarmby. Mr Quarmby had been employed by LiveBetter since January 2017 and on 27 May 2019, was promoted to the position of “Head of Disability NSW South”.
However, LiveBetter might have had second thoughts about the promotion if it had known that in March 2019, Mr Quarmby had incorporated a company styled “New Directions Disability Services Ltd” (New Directions). On 9 May 2019, New Directions applied for registration with the NDIS, and in August 2019, that registration was granted. Following the resignation of Mr Quarmby from LiveBetter, eight clients of LiveBetter (in some cases, through those clients’ guardians) gave notice to LiveBetter that they wished to terminate their supported independent living arrangements with LiveBetter. Although it seems that the notices did not specify that the clients would instead be transferring their NDIS funding to New Directions, it also appears that this was what would have occurred once the two months’ notice which was required had expired.
LiveBetter’s legal action
Before the notice period expired, LiveBetter commenced proceedings against Mr Quarmby, relying on a clause in Mr Quarmby’s contract of employment prohibiting the soliciting of “customers of LiveBetter on behalf of any other business”. That clause was not at all well-drafted; amongst other defects, it did not contain any limitation as to time, and was not limited to customers of LiveBetter with whom Mr Quarmby had dealt during the course of his employment.
In any state other than New South Wales, these defects would have been fatal to LiveBetter’s claim, because the restraint of trade would have been wider than was reasonably necessary to protect LiveBetter’s interests. However, specific legislation in New South Wales allows courts to read down over-broad restraints, so LiveBetter had at least an arguable case that what the Court described as “a relatively flagrant breach by Mr Quarmby of his duty of fidelity to LiveBetter” could be remedied by reading down the non-solicitation clause to deal with the eight clients.
The next hurdle that LiveBetter had to overcome was establishing the loss which it would suffer if it established that Mr Quarmby had breached his contract of employment. LiveBetter’s evidence indicated that lost revenue from the eight clients was likely to be in the vicinity of $3million. However, as the Court noted, “lost revenue by itself is not a useful measure of ultimate loss”. As the Court continued:
“As LiveBetter’s commercial objective is not-for-profit, and therefore in a sense charitable, it should not matter to LiveBetter in principle as to which enterprise provides the necessary services to disadvantaged or disabled clients, provided those services are delivered to an appropriate standard. If LiveBetter loses revenue as a result of the loss of agreements with its clients to a competitor, that should not matter to LiveBetter provided that it can make, in a timely way, an adjustment to its expenses to accommodate the reduction in revenue.”
However, that did not mean that LiveBetter would be unable to establish any compensable loss (even if the evidence which it provided on the interlocutory application, which dealt only with lost revenue, did not assist the Court in determining what the amount of that loss might be). The Court indicated, for example, that if it was necessary for LiveBetter to reduce expenses by dismissing staff (which would incur redundancy expenses), or if LiveBetter incurred costs in respect of group homes formerly used by the eight clients which could not easily be let to people without those clients’ specific needs, those extra expenses could support a claim for damages (or justify the grant of an injunction to prevent the damages from being suffered).
So, the fact that LiveBetter was a non-profit business, and could not establish a claim for conventional loss of profits if it succeeded in establishing that Mr Quarmby’s conduct was a breach of contract, was not fatal to its claim for an injunction (even though there was no evidence of what LiveBetter’s true loss might be).
As it turned out, the Court did ultimately refuse an injunction to prevent Mr Quarmby and New Directions from “availing themselves of the benefits” of any conduct of Mr Quarmby in breach of his contract. The reason for that refusal was that the Court was concerned about the effect of an injunction on third parties; namely, the clients. Although there was no evidence before the Court as to the specific nature of the clients’ disabilities, the Court did note that in most cases, the clients required guardians to act on their behalves.
Accordingly, although the Court said that in a commercial case, “it would ordinarily be of little concern that the grant of the injunction may oblige the customers to continue to deal with the plaintiff”, the special needs of the clients, and the fact that LiveBetter’s evidence did not establish that LiveBetter retained the capability to care for the clients, meant that an injunction preventing New Directions from providing NDIS services to the eight clients was not granted.
This case illustrates the importance of understanding what questions the Court will ask on an injunction application, and having available the evidence necessary to answer those questions, before making the application. Even accepting that these proceedings were commenced on an urgent basis in the Supreme Court’s vacation time over Christmas, LiveBetter’s evidence about lost revenue did not answer the question about what loss, if any, LiveBetter would be entitled to recover.
That this was not fatal to LiveBetter’s claim illustrates that charitable organisations which do not pursue commercial purposes can still incur commercial losses – and perhaps illustrates also that although charity has been said to cover a multitude of sins, it does not cover the sin of forbidden post-employment solicitation.
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