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Ryan v Mason HC Hamilton CIV-2011-419-83 [2011] NZHC 431; [2011] 2 NZLR 791 (19 April 2011)

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IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

_{CIV-2011-419-83}

BETWEEN FREDERICK MICHAEL RYAN First Plaintiff

AND FMML LIMITED Second Plaintiff

AND SEAN DILLON MASON Defendant

Hearing: 11 April 2011

Appearances: G H J Brant on behalf of the Plaintiffs/Respondent C T Gudsell QC and D A Thresher on behalf of the Defendant/Applicant

Judgment: 19 April 2011

_{RESERVED JUDGMENT OF PRIESTLEY J}

This judgment was delivered by me on Tuesday 19 April 2011 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date:...............................

Solicitors: Stace Hammond, PO Box 19-101, Hamilton

Tompkins Wake, PO Box 258, Hamilton

Counsel: C T Gudsell QC, PO Box 19085, Hamilton 2001

RYAN V MASON HC HAM CIV-2011-419-83 19 April 2011

The issue

[1] The defendant, as an interlocutory threshold point, seeks an order under r 5.49 of the High Court Rules that the High Court has no jurisdiction to hear the plaintiffs’ substantive proceeding.

[2] To that end, the defendant has appeared under protest to object to this Court’s

jurisdiction to hear and determine the proceeding.

[3] It is the defendant’s stance that the dispute between the parties is covered by the exclusive jurisdiction of the Employment Authority, and that body alone. Thus, the question under r 5.49 is whether the High Court can properly exercise jurisdiction over the plaintiffs’ proceeding.

Brief background

[4] The first plaintiff (Mr Ryan) and the defendant (Mr Mason) are both solicitors. Between February (approximately) 2008 and 7 January 2010 both solicitors were partners in the firm Ryan Law which practised in Morrinsville and Te Aroha. It is common ground that Mr Mason was a salaried partner. However, both solicitors were held out to the public to be partners. Some time around February

2008 Mr Mason appears to have obtained the necessary statutory approval from the New Zealand Law Society to practise on his own account, a necessity for partners in a law firm.

[5] For reasons which I need not detail (and which may well be the subject of future evidence), the relationship between the parties became strained during the second half of 2009. The end result was that, on 2 December 2010, Mr Mason wrote to Mr Ryan as follows:

Dear Mike

NOTICE OF RESIGNATION AS EMPLOYEE OF FMML LIMITED

& NOTICE OF TERMINATION OF PARTNERSHIP

I am writing to give notice that I intend to resign my employment with

FMML Limited and that I wish to terminate our partnership.

My resignation as employee is effective from the end of Friday 7 January

2010.

Our partnership shall terminate at the same time. Yours sincerely

Sean Mason

[6] On or after 10 January 2011, Mr Mason set up a solicitor’s office and began practice in Morrinsville under the name Sean Mason Law. Shortly thereafter Mr Ryan, now the sole principal of Ryan Law, began to receive authorities to uplift files from clients of Ryan Law.

[7] It is Mr Ryan’s perception, which has led to the proceeding, that Mr Mason is bound by a restraint of trade provision which prohibits him from competing in business with Ryan Law within a 20 kilometre radius of Ryan Law’s Morrinsville premises. Mr Ryan further contends that Mr Mason has been using confidential partnership information for his own benefit, in which regard Mr Mason is prohibited from approaching or soliciting the clients of the former partnership during the five year period immediately following the partnership’s dissolution.

[8] Some further brief background history is necessary. Despite its name, Ryan Law was not an entity with which Mr Ryan practised until 2007. Up to that point, Mr Ryan had practised as a solicitor in Te Aroha under the name Michael Ryan. The second plaintiff, FMML Limited (FMML), was effectively Mr Ryan’s service company, providing administrative services and employing staff. Ryan Law was the name of the practice of Mr Ryan’s brother, Peter Ryan, who practised in Morrinsville. Mr Mason had been involved in Mr Peter Ryan’s practice since 2003 and had a written employment agreement with Peter Ryan’s service company, Ryan Consulting Limited.

[9] Mr Peter Ryan seems to have exited from the scene in 2007 when Mr Ryan bought his practice. The name Ryan Law then attached to both the Morrinsville and Te Aroha offices.

[10] Although Mr Ryan’s amended statement of claim alleges that Mr Mason was an employee of FMML from about 1 January 2007, there is no evidence of any written employment contract with FMML. The status, fate, or transition of Mr Mason’s employment contract with Ryan Consulting Limited is problematic and may, at some future date, have to be the subject of evidence.

Amended statement of claim

[11] The plaintiffs’ current causes of action appear in their amended statement of claim. This was filed in late March after various problems emerged with both the plaintiffs’ first pleading and Mr Ryan’s first affidavit in which he appears to have muddled drafts of an alleged partnership agreement. Although regrettable, this confusion was perhaps understandable since Mr Ryan does not possess any signed copy of a partnership agreement. The only executed copy is in the possession of Mr Mason who asserts in one of his affidavits that, although his witnessed signature appears on the document, he discovered, after signing it, that the document did not actually represent what its parties had agreed. He therefore deliberately refused to return it to Mr Ryan, thus relying on the provisions of s 9 of the Property Law Act

2007. Had he not been aware of that provision and relied on it, he says he would have torn the agreement up. His failure to return the partnership agreement seems to have passed unnoticed by Mr Ryan who, despite having signed the agreement, never took any steps to ask for it.

[12] The signed partnership agreement is dated (in what would appear to be Mr

Mason’s handwriting) 22 July 2008.

[13] Whether or not the signed partnership agreement actually represents the parties’ relationship and is binding on them is of critical importance to Mr Mason. It is the only document which contains any restraint of trade provision.

[14] With that preamble I set out the four causes of action which the plaintiffs plead.

[15] The first cause of action alleges that Mr Mason owed Mr Ryan a contractual duty not to set up a competing business within a 20 kilometre radius of Ryan Law’s Morrinsville premises. That cause of action clearly relies on a provision in the

22 July 2008 partnership agreement.

[16] The second cause of action alleges that Mr Mason is contractually obliged not to solicit Ryan Law’s clients for a period of five years from the partnership termination date of 7 January 2011. Both first and second causes of action are brought by Mr Ryan as first plaintiff.

[17] The third cause of action is brought by the second plaintiff FMML and alleges that Mr Mason has a contractual duty not to solicit Ryan Law clients within a six month period from the date of the termination of his employment.

[18] The fourth cause of action, brought by both Mr Ryan and FMML, alleges that Mr Mason has breached various duties of fidelity and good faith which are claimed to have arisen as contractual duties grounded in both Mr Mason’s employment relationship and his partnership relationship. Duties of fidelity include a duty of confidence imposed on Mr Mason not to use confidential information of Ryan Law for his own benefit.

Discussion

[19] Rule 5.49, on which Mr Mason relies, relevantly provides:

5.49 Appearance and objection to jurisdiction

(1) A defendant who objects to the jurisdiction of the court to hear and determine the proceeding may, within the time allowed for filing a statement of defence and instead of so doing, file and serve an appearance stating the defendant's objection and the grounds for it.

(2) The filing and serving of an appearance does not operate as a submission to the jurisdiction of the court.

(3) A defendant who has filed an appearance may apply to the court to dismiss the proceeding on the ground that the court has no jurisdiction to hear and determine it.

(4) The court hearing an application under subclause (3) must,—

(a) if it is satisfied that it has no jurisdiction to hear and determine the proceeding, dismiss the proceeding; but

(b) if it is satisfied that it has jurisdiction to hear and determine the proceeding, dismiss the application and set aside the appearance.

...

[20] It is clear from the terms of r 5.49(4) that the options for the Court are either to dismiss the proceeding if satisfied there is no jurisdiction or to dismiss the application and set the appearance aside.

[21] Stone v Newman^[1] is probably the best relevant authority, being a Court of Appeal judgment dealing with the predecessor rule, r 131. The case is not entirely on all fours given that there was a foreign jurisdiction element and the proceeding had been commenced in the Commercial List. The focus, however, must be on the statement of claim and the plaintiffs’ supporting evidence:

[25] In that context the focus of the Court in considering an application to dismiss for want of jurisdiction under Rule 131 must be on the allegations made in the statement of claim and the affidavit evidence the plaintiff has put forward in support of them. The Judge will of course have regard to the plausibility of that evidence, in light of all the material before the Court, including that in the defendant’s affidavits. But in considering whether the plaintiff’s account meets the required standard the Court should take into account the inability of the plaintiff to obtain for discovery at this stage especially in relation to matters that might be within the exclusive knowledge of the foreign defendant. On the other hand where the principal documentary evidence in the case appears to be available and the plaintiff’s assertions contradicting it vague or improbable, a Judge is certainly not required to accept uncritically the factual assertions on which it is submitted on behalf of a plaintiff that there is a good arguable case.

[22] Both counsel have made detailed, even painstaking submissions, which I have considered. Mr Gudsell QC’s argument is simple. There was never a true partnership between Messrs Ryan and Mason. All the evidence pointed towards the relationship being an employer/employee relationship. It was not possible for Mr Mason’s relationship to be both partner and employee. Thus the parties’ relationship was governed by s 161 of the Employment Relations Act 2000 which stipulates that

_{the Employment Authority has exclusive jurisdiction.}

[23] Section 161 relevantly provides:

161 Jurisdiction

(1) The Authority has exclusive jurisdiction to make determinations about employment relationship problems generally, including—

(a) disputes about the interpretation, application, or operation of an employment agreement:

(b) matters related to a breach of an employment agreement:

(c) matters about whether a person is an employee (not being matters arising on an application under section 6(5)):

...

(e) personal grievances:

(f) matters about whether the good faith obligations imposed by this Act (including those that apply where a union and an employer bargain for a collective agreement) have been complied with in a particular case:

...

(m) actions for the recovery of penalties—

(i) under this Act for a breach of an employment agreement: (ii) under this Act for a breach of any provision of this Act

(being a provision that provides for the penalty to be recovered in the Authority):

...

(n) compliance orders under section 137:

...

(r) any other action (being an action that is not directly within the jurisdiction of the Court) arising from or related to the employment relationship or related to the interpretation of this Act (other than an action founded on tort):

(s) determinations under such other powers and functions as are conferred on it by this or any other Act.

...

(3) Except as provided in this Act, no court has jurisdiction in relation to any matter that, under subsection (1), is within the exclusive jurisdiction of the Authority.

[24] Thus, as a matter of jurisdiction, Mr Gudsell submits s 161(3) ousts the jurisdiction of any court other than the Employment Authority. Mr Ryan’s allegations relate to alleged breaches of Mr Mason’s employment contract, its interpretation, and good faith obligations in particular.

[25] Mr Mason relied on the Employment Court authority of James & Wells Patent and Trademark Attorneys v Snoep.^[2] That case involved a salaried partner of a patent attorney. Mr Snoep’s 2001 employment agreement contained restraint of trade provisions. The issue was whether or not the employer was entitled to an interim injunction. Judge Couch found assistance in the English authority of Stekel v Ellice^[3] in which Megarry J focused on the term “salaried partner”.

[26] With respect, the authority of Stekel v Ellice is, for obvious reasons, likely to be more persuasive than an Employment Court decision which focused on injunctive relief. I record, however, that Judge Couch, in a case which involved a salaried partner, found the English authority helpful and considered that its approach coincided with the definition of “employee” contained in s 6 of the Employment Relations Act 2000.

[27] Megarry J was dealing with a salaried chartered accountant. Under the terms of an agreement, the salaried partner clearly had no interest in the firm’s capital or in its clients. Nor was there any express mention of good will. The intention of the agreement, the Court held, was to exclude the plaintiff from any proprietary interest in the partnership. However, Megarry J did say:^[4]

I have found it impossible to deduce any real rule from the authorities before me, and I think that while paying due regard to those authorities, I must look at the matter on principle. It seems to me impossible to say that as a matter of law a salaried partner is or is not necessarily a partner in the true sense. He may or may not be a partner depending on the facts. What must be done, I think, is to look at the substance of the relationship between the parties; and there is ample authority for saying that the question of whether or not there is a partnership depends on what the true relationship is and not on any mere label attached to that relationship. A relationship that is plainly not a partnership is no more made into a partnership by calling it one than a

relationship which is plainly a partnership is prevented from being one by a clause negating partnership.

[28] Mr Gudsell then looked at the 22 July partnership agreement on which Mr Ryan is disposed to rely, and pointed to various clauses which reserved all partnership profits to Mr Ryan; indemnified Mr Mason in respect of all partnership debt; relieved Mr Mason of any obligation to contribute to partnership capital; and expressly denied Mr Mason any rights in the partnership business or assets. On that basis, submitted counsel, there was no true partnership. It thus followed that Mr Mason was an employee.

[29] Mr Brand’s submissions focused on the amended statement of claim. He referred to the provisions of s 4(1) of the Partnership Act 1908 which defines a partnership as a “relation which subsists between persons carrying on a business in common with a view to profit”. Although Mr Mason was on a salary, it was clearly in his interest, both direct and indirect, that the legal partnership was profitable. Counsel stressed that the amended statement of claim alleged an employment relationship only with FMML. In his submission there were two relationships (as spelt out in Mr Mason’s resignation letter) being both a partnership relationship and an employment relationship. Partners, additionally from whatever an agreement may provide, have a reciprocal duty of keeping confidence and are in a fiduciary relationship.

[30] Included in the plaintiffs’ statement of claim were allegations which ranged well beyond the confines of an employment contract. Use of confidential information, having as it did roots in equity, gave to this Court inherent power to grant equitable damages for breach of equitable duties (such as breaches of confidence and fidelity). The plaintiffs were claiming exemplary damages as well as the equitable remedies of accounting for profits or an inquiry into damages.

[31] The plaintiffs’ causes of action relating to the restraint of trade provision in the partnership agreement, breach of the non-solicitation covenant, and breaches of the duties of fidelity and confidence, arose out of a partnership relationship and not an employment contract.

[32] Both counsel referred to the Full Court judgment of BDM Grange Ltd v Parker.^[5] That involved a dispute between a company and one of its directors, who was also its employee. The following dicta are helpful, recognising as they do that the duty of confidence is an equitable duty:

[82] At para 41-030 Meagher cites Coco v AN Clark (Engineers) Ltd [1969] RPC 41 at 46 where Megarry J repeated the couplet attributed to Sir Thomas More LC:

Three things are apt to be helpt in Conscience [i.e. the Court of Chancery] Fraud, Accident and things of Confidence.

Meagher states at para 41-040:

The better view is that the equitable duty of confidence has now sufficiently developed... to be regarded as occupying a specific field of its own...

[83] Is the present claim in respect of confidential information to be treated as for breach of an implied term of the contract of employment and thus within the broad exclusive jurisdiction of the Authority and the Employment Court? Or is it to be treated as a claim either in equity or, as Meagher would have it, sui generis so as to fall outside that jurisdiction? If so, does it fall within s 161(1)(r)?

[84] We are concerned not with an historical exegisis but with the practical task of construing social legislation creating a boundary between jurisdictions. In The Conflict of Laws (13^th ed 2000) Volume 1 para 2-035

Dicey & Morris describe the process of characterisation in the more complex sphere of the boundary between legal systems of two states:

The way the court should proceed is to consider the rationale of the English conflict rule and the purpose of the substantive law to be characterised. On this basis, it can decide whether the conflict rule should be regarded as covering the rule of substantive law.

Ours is the simpler task of construing a single statute of the New Zealand Parliament. But to discern its true meaning requires a similar careful consideration of its rationale and purpose as it applies to the present facts. The starting point must be what is claimed.

[85] The change of BDM’s pleading from the ASC to the 2^nd ASC is notable. The former alleged that during the course of his employment by BDM Mr Parker had access to confidential information which he later misused, the latter that while holding the office of director he had such access which he later abused.

[86] We consider that the specific role in which Mr Parker is alleged to have acted is again of fundamental importance. Insofar as the claim is

against Mr Parker qua director it is related not to a breach of an employment agreement but to failure to perform the distinct direction function. Since it is the latter which is now asserted there can be nothing to engage the jurisdiction of the Authority. So this Court retains jurisdiction.

[87] Insofar as Mr Parker was acting qua employee his conduct was in breach of his duty of good faith owed to his employer under s 4 of the Authority. The ERA places that duty at the heart of an employment relationship; it follows that breach of that duty must “relate to” such relationship. Secreting information for the purpose of taking improper advantage of it in the future would breach both that provision and a term of his contract implied at common law.

[88] In performing a careful conflict of jurisdictions analysis there may be noted the sharp antithesis between s 162 (conferring extensive contract jurisdiction) and s 100 (which by conferring only narrow injunction power suggests the exclusion of significant equity jurisdiction). The contrast indicates that, insofar as a claim alleging breach of confidence is brought essentially to achieve performance or to seek relief for breach of the employment contract, it is properly to be construed as arising from the employment relationship and thus within the exclusive jurisdiction of the Authority and the Employment Court. However, a claim for relief which in essence arises not out of the employment relationship, but is to be characterised as substantially, say, a claim in equity (or, if the cause of action is as Meagher considers sui generis, for breach of confidence simpliciter) is properly within the jurisdiction of the High Court. It is unnecessary for the decision of this case to pronounce upon remedies; it may be that the need to seek equitable relief such as account will be a pointer away from characterisation of the claim as within the jurisdiction of the Authority. Again there will be concurrent complementary jurisdictions of this Court and the Authority.

[89] We do not attempt in this judgment to provide guidance beyond what is needed to decide this case. The open-textured language of the ERA will require the characterisation process to be worked through on the different facts of future cases.

[90] In this case, once Mr Parker ceased to be an employee the employment relationship was at an end. While is unnecessary for us to determine the question, we consider that the Authority would not have jurisdiction in relation to subsequent misuse of confidential information obtained during the employment relationship without breach of duty at the time (see Printers & Finishers Ltd v Holloway [1965] 1 WLR 1, New Zealand Needle Manufacturers Ltd v Taylor [1975] 2 NZLR 33).

[33] What the case demonstrates is that an employment relationship can co-exist with another relationship and that other relationship may attract equitable obligations and remedies which might not be appropriately resolved by the narrower remedies available to the Employment Authority.

Evaluation

[34] The difficulty facing both parties (as Mr Gudsell candidly accepted) is that Messrs Ryan and Mason, although solicitors, will both encounter problems in establishing the precise nature and terms of their relationship. The plaintiffs rely heavily on certain clauses contained in the July 2008 partnership agreement. Yet Mr Mason denies that it is binding on him. Obviously, if the matter is to proceed to a substantive hearing, cross-examination of both parties and factual findings will be critical.

[35] Although there is no dispute that Mr Mason was a salaried partner, there are obvious difficulties in pointing to the terms of his employment. Was the partnership agreement a contract? Mr Mason, for his part, denies that the document is binding. If the document was intended to be merely an employment contract, then one must wonder why Mr Ryan, on his evidence, went to the lengths he did to draft a document which, although in outward form a partnership agreement, was intended by him to deny to Mr Mason most of the indicia and benefits of a partnership.

[36] Is there another employment contract? All that has so far been placed before the Court is the document between Mr Mason and the service company (Ryan Consulting Limited) of his previous employer Mr Peter Ryan. What was the effect on that employment contract of Mr Ryan buying his brother’s practice and arranging for Mr Mason’s salary to be paid by FMML? And even more importantly, what (if there was an employment contract between FMML and Mr Mason) was the effect of the creation of the partnership in which Mr Mason was a salaried partner?

[37] The factual matrix is muddled and has yet to be determined. Although he was in receipt of a salary rather than an entitlement to partnership profits, there can be no doubt that Mr Mason was held out to be a partner of Ryan Law and was able (within certain categories) to bind the partnership by undertakings. He satisfied the New Zealand Law Society, for all the purposes of the Lawyers and Conveyancers Act 2006, that he was a partner practising on his own account.

[38] Although Mr Ryan may have difficulties in establishing that Mr Mason was indeed a partner for the purposes of some or all of the plaintiffs’ claims, I consider Mr Mason may have equal difficulty in establishing that he was not a partner at all but merely an employee.

[39] As Megarry J stated (supra [27]) the nomenclature is not decisive. What is decisive is an examination of the true relationship. This will involve a factual inquiry in a situation where there is no obvious employment contract. There is a disputed partnership agreement which, quite apart from the dispute, may or may not, in conjunction with evidence of the parties’ daily dealings, establish a partnership relationship. So, it is far from clear that there is only an employment contract and no other relationship.

[40] I do not see this is an “either/or” situation. It may well be, after scrutiny and assessment of the parties’ evidence, that the relationship between Messrs Ryan and Mason is a hybrid one, some parts of which are a partnership relationship and other parts of which are an employment relationship.

[41] There is force too in Mr Brand’s submission that the relief sought by the plaintiffs is premised on there being a relationship to which equitable obligations attach. The High Court is a Court of Equity. The Employment Authority is not. To the extent that the plaintiffs may well be entitled to equitable remedies on this current or some future amended pleading, I am satisfied this Court has jurisdiction which s 161(3) does not oust.

[42] These reasons lead me to the conclusion that s 161 of the Employment Relationships Act, and in particular s 161(3), do not in the circumstances of this case oust the High Court’s jurisdiction.

[43] Finally, although not determinative, I see the status of both Mr Ryan and Mr Mason as a relevant factor. Both are on the roll of solicitors of this Court. Both are entitled to practise on their own accounts. Being a solicitor would not in itself be sufficient reason to read down s 161 if the relationship between two solicitors was solely that of employer and employee. There is no reason why the Employment

Authority should not resolve a mere employment dispute. But this dispute, involving two officers of the Court against the unhappy background they have created is, in my judgment, better resolved in the High Court.

Result

[44] It follows from my evaluation that the defendant’s application under r 5.49(3), being its protest to jurisdiction, is dismissed and the defendant’s appearance is set aside.

Costs

[45] Prima facie the plaintiffs are entitled to costs. However, given that this proceeding is potentially at an early stage, I reserve costs.

Other matters

[46] I strongly urge Mr Ryan and Mr Mason to resolve their dispute. Whether Mr Ryan can successfully rely on the 22 July 2008 partnership agreement and whether Mr Mason has viable defences (depending on factual findings) to the plaintiffs’ equitable claims are both problematic. The communities in which both solicitors practise will not be assisted by an ongoing and unresolved commercial dispute.

[47] I direct the Registry to list this matter for timetable orders and directions in the first civil callover after 23 May 2011. That interval should afford the parties an opportunity to consider their respective positions.

..........................................
Priestley J

^[1] Stone v Newman [2002] NZCA 48; (2002) 16 PRNZ 77 (CA). Affirmed by the Supreme Court in University of

Newlands v Nationwide News Pty Ltd [2006] NZSC 16; (2006) 18 PRNZ 70.

^[2] James & Wells Patent and Trademark Attorneys v Snoep HC Christchurch CC16/09, 28 October _2009.
^[3] _{Stekel v Ellice [1973] 1 All ER 465 at 472-473.}
^[4] At 473.

^[5] BDM Grange Ltd v Parker [2005] NZHC 515; [2006] 1 NZLR 353.