Australia: Non-party costs order made against new employer in restraint case

In the recent decision of HRX Pty Ltd v Scott [2013] NSWSC 451, Chief Justice in Equity Bergin ordered costs to be paid by Talent2 Pty Ltd (Talent2), the employer of an employee in breach of his post employment restraint obligations to previous employer HRX Pty Ltd (HRX).


Mr Scott was the business development manager of recruitment firm HRX before resigning in January 2012 and taking up a position with competitor, Talent2 on 2 April 2012. Mr Scott's employment contract with HRX contained a restraint clause that prevented him from working for a competitor of HRX, or soliciting clients or other employees for a period of 12 months.

HRX became aware that Mr Scott was working for Talent2 in July 2012. HRX wrote to Talent2 at this time, requesting undertakings that it would not permit Mr Scott to perform any work for them before 31 January 2013.

Initially Mr Scott misinformed Talent2 by advising that he believed he was subject to a 6 month restraint only and that he had not done anything to breach any obligation still owing to HRX, including taking any HRX confidential information when he left his previous employment.

Based on their discussions with Mr Scott Talent2 refused to give the requested undertakings and entered into an arrangement with its solicitors whereby though Mr Scott would instruct them, Talent2 would pay the legal costs of defending any action brought by HRX. However even when presented with evidence that the restraint was for 12 months Talent2 continued to support Mr Scott's litigation and pursued the argument that the 12 month period was unenforceable as an unreasonable restraint of trade.

Furthermore when Talent2 found out that Mr Scott had in fact taken confidential information (though he stated that he had not used it in any way and had deleted it) Talent2 continued to fund the defence of HRX's claim for a further 3 weeks.

After litigation had been commenced and considerable legal costs incurred for both sides (including costs incurred for an interlocutory application) Talent2 reviewed its position and advised that it could no longer fund Mr Scott's defence of HRX's claim. Following this Mr Scott settled with HRX and agreed to non-compete and non-solicitation orders for the full 12 month period.

Costs Awarded

Even though this case did not proceed to trial, Bergin CJ in Eq found that costs can be awarded where, despite an agreed outcome, one party has had a "substantial victory" and the other a "substantial loss".

Bergin CJ in Eq referred to a number of factors that could be taken into account when considering whether a third party should be held liable for the costs of a successful party, including whether the non-party played an active part in the conduct of litigation, whether they funded the litigation, whether proceedings would have been undertaken if it had not been for the non-party's intervention, whether the unsuccessful party in the litigation is unable to afford the costs and whether the non-party had a substantial interest in the litigation.

The Court found that Talent2 had funded the litigation and it did so knowing that Mr Scott was not in a position to fund any litigation against him and being aware of the probability that had Talent 2 not funded Mr Scott he would have capitulated at the outset.

Talent2 were also found to be involved in the conduct of the litigation, as even though they were not "instructing" the solicitors, they had involvement in the strategy, as the strategy depended on Talent2's financial assistance and therefore Talent2 was always kept "in the loop".

It was found that Talent2 stood to gain from the litigation. If successful in defending HRX's claim Talent2 would retain an experienced employee, Mr Scott, and it enabled Talent2 to "signal to HRX that it and its employees would "stand up to" litigation commenced by it."

Based on the above Talent2 were ordered to pay HRX's costs of the proceedings (including HRX's application for costs).

No Need to Seek Costs from the Employee

There was no need for HRX to first seek its costs from Mr Scott before looking to Talent2 for payment. However Bergin CJ in Eq considered the issue of whether costs could be awarded against Mr Scott, had they been sought. Bergin CJ in Eq found that costs could be awarded because Mr Scott not only eventually capitulated because the finance from Talent2 had been withdrawn, but also because he was "well aware of his inappropriate use of the information which was the property of HRX."


In ordering Talent2 to pay HRX's costs the Court noted 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 former employers, particularly where the consequence of such breach is a benefit to the new employer".

Employers should take heed of Bergin CJ in Eq's statement and ensure they are aware of the existence and content of any post-employment restraint which applies to any prospective employees. In doing so this may require more than just asking the individual, employers may wish to request copies of the restraint provisions or perhaps seek undertakings from the individual.

If a prospective employee is subject to a post-employment restraint, employers should consider obtaining legal advice to ensure they fully understand the risks involved in hiring such an employee.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Kemp Strang has received acknowledgements for the quality of our work in the most recent editions of Chambers & Partners, Best Lawyers and IFLR1000.

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