50113/03 BEACHES & BUSH PROPERTIES PTY LTD V JOHN GRAHAM JENNINGS
JUDGMENT
1 HIS HONOUR: By summons filed on 20 August 2003, the plaintiff seeks as final relief an order that, for a period of six months from 10 August 2003, the defendant be restrained from being employed or involved in providing the services of a real estate agency within a defined area from Bendalong in the north to Bawley Point in the south in New South Wales. There is no claim for damages. When the case came before me yesterday, after the defendant had been served and had prepared an affidavit, the parties informed me that they did not wish to cross-examine witnesses, and they agreed that the case be heard and determined on final basis.
2 On the coast of New South Wales between Nowra to the north and Batemans Bay to the south, along the Princes Highway, there are many pretty coastal towns which are well-known to the city dwellers of Sydney and Canberra as holiday destinations. Further inland is the Morton National Park, and it is only along the coastal strip that there is any concentration of dwelling areas. One of the coastal towns is Ulladulla, which is midway between Nowra and Batemans Bay. The plaintiff is a real estate agency carrying on business from offices in Ulladulla. The two main components of its business are the sale of dwellings and the management of rental properties. It has 21 listings for sale of the present time, and 55 properties under management.
3 The sole director and shareholder of the plaintiff is Milton Leslight. His wife is also active in the business. The defendant disputed Mr Leslight's contention that he is the sole director of the plaintiff, but subsequently Mr Leslight repeated the contention and, as he is in a position to know the truth, I prefer his evidence on this point.
4 The defendant was employed by the plaintiff to work as a salesman, commencing on 21 October 2002. Before that time he had never worked as a real estate salesman, although he had completed a real estate course at Ulladulla with the assistance of Centrelink. He lives at Narrawallee, which is not far from Ulladulla, to the north. He says he has strong ties with the local community, teaching martial arts three nights a week at Bawley Point and Milton. During his period of employment with the plaintiff, the defendant received a wage and a car and telephone allowance. There was a group commission system on the basis of which, if a target was reached, then commission would be distributed amongst the staff, but the defendant did not receive any distribution of group commission during his employment because the target was not reached.
5 Before the defendant commenced his employment, Mr Leslight gave him a copy of a two forms of agreement. The defendant did not sign them immediately, but he did so on Friday of his first week of employment, 25 October 2002. He did not ask to amend any part of them relating to the obligation not to complete upon leaving employment with the plaintiff. The evidence implies that the contract of employment between the parties was on the terms of the two forms of agreement. There is no evidence to establish that the defendant signed the agreements as a result of pressure from the plaintiff or any other vitiating circumstance.
6 The first agreement provided that, for the purposes of the Real Estate Industry (State) Award, the defendant (referred to in the agreement as the Employee) would be classified as a "Salesperson (Probationary)". The agreement said that the employment was subject to satisfactory completion by the Employee of a three-month trial period. Clause 7.1 of the agreement provided that if the employee wished to terminate his employment, and the agreement, voluntarily, he was required to give one week's notice in writing to the Employer. Clause 7.5 required the Employee, on termination, immediately to deliver up all property and information belonging to the Employer, including a number of listed items including client lists and other items in relation to any property listed with the Employer at the date of termination. Clause 8 imposed on the Employee a duty of confidentiality, extending to names and other information contained in the Employer's database.
7 The second agreement was headed "Confidential Information and Obligation not to Complete". Clause 3 of that document was as follows:
"In order to reasonably protect the goodwill of Beaches & Bush Properties Pty Ltd, you agree that you will not, without the prior consent Beaches & Bush Properties Pty Ltd, directly or indirectly participate, assist or be interested in (whether as a sole operator, partner, associate, consultant, employee, independent contractor, employer or in any other capacity) the commission of each Restricted Activity during each Restricted Period as defined below. You acknowledge that the restraints imposed by this clause are fair and reasonable.
For the purposes of this agreement each of the following activities is a Restricted Activity together with a Restricted Period :
(a) Soliciting the business of any kind of Beaches & Bush Properties Pty Ltd for services similar to those supplied by Beaches & Bush Properties Pty Ltd for six months after your employment ends;
(b) Soliciting any employee of Beaches & Bush Properties Pty Ltd to leave the employment or agency of Beaches & Bush Properties Pty Ltd for one month after your employment ends;
(c) For a period of six months after your termination of employment within Bendalong through to Bawley Point directly or indirectly, on your own account or on behalf of or within association with others carry on, be employed in or in any way involved in any activity or business of providing the services of a real estate agency."
8 The defendant submitted that clause 3 was part of the contractual arrangements applying to the defendant during his three-month probationary period, and was not a term of any contract continuing after the probation had ended. I disagree. Clause 1.3 of the first agreement makes provision for the employment to be confirmed after the probationary period. Since the defendant continued in employment after his first three months with the plaintiff and there is no evidence to the contrary, I infer that such confirmation took place. Clause 2.1 of the first agreement refers to the period of employment in such a manner as to imply that it continues beyond probation. Clause 7, dealing with termination, is clearly intended to continue to apply after the expiration of the probation period, and it refers to termination of the agreement as well as the employment. There is nothing in clause 8, dealing with confidentiality, nor any part of the second agreement, to suggest that the restrictions contained in those provisions were intended to govern only the period of probationary employment. Such in intention would be most unlikely.
9 On 7 August 2003 the defendant tendered a written notice giving one week's notice of resignation. He wrote a handwritten letter dated 10 August 2003 in which he said he would not come into the office for the remainder of the week. He expressed regret that things had not turned out as expected and said that his time with the plaintiff had been a "fantastic learning experience".
10 According to the plaintiff's evidence, on 10 August 2003 the defendant told another employed salesperson, Ms Leggatt, that he would be leaving his employment with the plaintiff and taking employment with Countrywide Real Estate on or about 25 August 2003. Countrywide Real Estate has offices at Milton and Mollymook, which are towns very close to Ulladulla. The plaintiff's solicitors wrote to the defendant on 13 August 2003, complaining that the defendant did not give the requisite one week's notice and drawing his attention to clause 3 of the second agreement. The letter threatened an application for injunctive relief. Proceedings for an injunction were commenced, as I have said, on 20 August 2003.
11 The case raises the question whether clause 3 of the second agreement is a reasonable restraint of trade. If it is not, the plaintiff invites the Court in to apply s 4 of the Restraints of Trade Act 1976 (NSW), which permits the Court to order that the restraint be valid to such extent as it is not against public policy (see, generally, KA & C Smith Pty Ltd v Ward (1998) 45 NSWLR 702, 724ff).
12 The question which the law requires me to consider is whether the restraint is reasonable, with reference to the interests of the parties concerned and the interests of the public: "so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public": Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co [1894] AC 535, 565 per Lord Macnaghten. In applying the test, the Court is required to "make a broad judgment on a commonsense basis and on impression for the simple reason that the issue is not capable of determination by precise calculation": Fleming Brothers (Monaro Agencies) Pty Ltd v Smith [1983] ATPR para 43-389 at 44,571, per Holland J. So far as the parties' interest is concerned, the restraint "must afford no more than adequate protection to the party in whose favour it is imposed": Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 707 per Lord Parker of Waddington. If the restraint confers no greater protection than can be justified, no other issue of reasonableness arises and it is unnecessary to consider further the public interest: Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288, 386.
13 In order to apply these principles, and in particular to decide whether the restraint gives no more than adequate protection to the party in whose favour it is imposed, it is necessary to consider what it is for which, and what it is against which, protection is required, as Lord Parker pointed out in the Herbert Morris case (at 708). Where the issue arises between vendor and purchaser of a business, often it is the goodwill of the business that is to be protected by the restraint, but it is quite different in the case of an employer taking a restraint from his employee.
14 Lord Parker said (at 709):
"The goodwill of his business is, under the conditions in which we live, necessarily subject to the competition of all persons (including the servant or apprentice) who choose to engage in a similar trade. The employer in such a case is not endeavouring to protect what he has, but to gain a special advantage which he could not otherwise secure. I cannot find any case in which a covenant against competition by a servant or apprentice has, as such, ever been upheld by the Court. Wherever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer's trade secrets as would enable him, if competition were allowed, to take advantage of his employer's trade connection or utilise information confidentially obtained."
15 In the same case Lord Atkinson observed (at 702) that the employer is entitled "not to have his old customers by solicitation or such other means enticed away from him", but he added that the employer is not entitled to "freedom from all competition per se". Similarly, in Dewes v Fitch [1920] 2 Ch 159, 181, Warrington LJ said that the employer is not entitled to require protection against mere competition, and he added:
"What he is entitled to protection against is the use by the employee against him in his business of knowledge obtained by him of his employer's affairs and the influence required by him over his customers in the course of an ordinary trade, and, in the case of professional man, over what is more commonly called his clients."
16 These principles have been applied in Australia, in such cases as Lindner v Murdock's Garage (1950) 83 CLR 628 (see at 635 per Latham CJ and at 649 per Fullagar J) and Phillip M Levy Pty Ltd v Christopoulos [1973] VR 673. In the latter case the principles were applied to a real estate agent who employed the defendant as a sub-agent. A contractual restriction operating for a period of one year after determination of the sub-agent's employment, and within a radius of one mile of any of the plaintiff's offices, which were in three locations in suburban Melbourne, was held to go further than was necessary to protect the plaintiff's interest. Kaye J found that the plaintiff's interest in its customers was a proprietary interest which it was entitled to protect by a restraining covenant, but the reputation gained by the defendant as a result of the plaintiff's promoting him as a salesman did not give the plaintiff any such proprietary interest.
17 Mr Leslight gave evidence that, in the three years in which they have conducted the business, he and his wife have undertaken work which, according to Mr Leslight's evidence, is not the general within the local industry. He gave a list of such activities, covering such matters as sending monthly letters to client vendors, and training staff in public relations and methods of taking photographs. He said that as a result of these activities he considered that the plaintiff's business is unique in his local area. However, I agree with the submission of counsel for the defendant, based on the above authorities, that these special activities do not of themselves create an interest of a kind that the plaintiff would be entitled to protect by the contractual restraint at issue in this case. The authorities show that employees are entitled to take with them, when they leave, the training they receive whilst in employment, and an employer cannot seek to protect itself by restraint upon its employees simply in order to preserve its competitive position. As Mr Leslight himself acknowledges, competition in the area is intense.
18 The critical question is whether clause 3 is a reasonable restraint to protect the interest which, according to the cases, and employer undoubtedly has, with respect to preservation of its client base. In the present case the defendant strongly submitted that the plaintiff's evidence failed to establish that the defendant had obtained personal knowledge of the plaintiff's customers or influence over them, and consequently there was no evidence of any legitimate interest that could justify the restriction in clause 3. I disagree with this submission.
19 The evidence shows that it is in the nature of the real estate industry that a real estate salesman's relationship with clients is direct and personal. According to the evidence, a real estate salesman builds up a relationship of trust and confidence with existing and prospective vendors and purchasers of properties, on behalf of his or her employer, and the clients rely to a substantial degree on the salesman's advice. The defendant gave evidence that salespersons working for the plaintiff have only a limited opportunity and time to develop personal relationships with clients, but that assertion appears to be inconsistent with the proposition, accepted by the defendant, that the duties of salespersons included making appraisals of properties and having "control" of listed properties in the way that he describes in his affidavit, which includes keeping the client informed by telephone and letter.
20 In the present case the defendant participated with another employee of the plaintiff in 31 attendances at the properties of prospective vendors for "appraisals" (about 25% of the appraisals carried out by the plaintiff during the relevant period), although he prepared only 12 of the written appraisals that resulted from that process.
21 I accept the defendant's evidence that, during his employment, negotiations for the sale of properties were not carried out by him, and that, while the plaintiff required its salespersons to inform clients and potential clients that they were dealing with the whole of the plaintiff company rather than an individual, he was also required to tell the clients that he would not carry out sale negotiations. It appears from Mr Leslight's evidence, however, that the licensee of the business, Mr Allen, and two senior salespersons were engaged in the negotiation process. I also accept that the plaintiff required its salespersons to keep records of telephone conversations and to provide information during Monday sales meetings which was taken down by support staff and recorded in property performance sheets. I accept that the defendant had "control", in the manner in which he explains it in his affidavit, of only eight properties during the probationary period, and that he had four listings under his "control" when he resigned.
22 Nevertheless it appears to me that the evidence, as a whole, shows that, by virtue of his employment over the period from October 2002 to August 2003, the defendant was put in contact with individual clients of the plaintiff in circumstances where he had the opportunity to develop a personal relationship with the clients and to influence them. To the extent that those clients were not bound by exclusive arrangements with the plaintiff, it would be reasonable for the plaintiff to apprehend that upon his departure, the defendant would be in a position to divert the business of those clients away from the plaintiff and to his new employer.
23 There is some conflicting evidence as to whether the plaintiff had any "repeat business". The issue is partly beside the point, given that there is evidence that the relationship with an individual vendor client may endure for some time, up to about 12 months. That evidence means that the defendant may be in a position to influence the client to disengage from the plaintiff even if the client has no repeat business. But there is also evidence that there are 55 properties under management, implying that there are a substantial number of clients who are investors with a continuing business relationship with the plaintiff and, I would infer, some prospect of repeat business.
24 There was some evidence given by the defendant that the plaintiff and the proposed new employer, Countrywide, have different marketing structures and target different clientele. It appears to me that, even assuming that the defendant's evidence is wholly correct (and substantial parts were denied by the plaintiff), there is still a sufficient overlapping of activities that it is reasonable for the plaintiff to protect its interests by a restriction that would prevent the defendant from working for such an agency as Countrywide.
25 As to the reasonableness of the geographical area stipulated in clause 3, the following evidence is relevant:
· the proscribed area serves a small population of approximately 18,000 people;
· the proscribed area is outside any metropolitan or large suburban area;
· the real estate agencies in the proscribed area are, for the most part, on the eastern side of the Princes Highway, with the exception of one at Ulladulla and two at Milton (including the Countrywide agency), each of which has a frontage to the Princes Highway;
· real estate salesman employed in the area between Nowra and Batemans Bay are often required to travel up to 200 kilometres each day incidentally to their employment;
· the plaintiff has received applications for employment from real estate salesman who reside 50, 54, 55 and 60 kilometres respectively from its office;
· there are 56 real estate agencies within 35 to 65 km of the defendant's home, but outside the prescribed area;
· the distance from the defendant's home to the northern edge of the proscribed area is 20 km, and Nowra is 70 km away;
· the distance from the defendant's home to the southern edge of the proscribed area is 25 km and Batemans Bay is 50 km away;
· the nearest agencies outside the proscribed area are at Huskisson and Batemans Bay;
· although the defendant submitted that, if he were required to take employment outside the proscribed area, he would have to drive for about an hour from home to place of work, Mr Leslight gave more precise evidence, which I prefer, that the drive from Ulladulla to Batemans Bay takes approximately 35 minutes, and the drive from Ulladulla to Nowra takes approximately 50 minutes.
26 In light of this evidence, I have reached the conclusion that the restraint imposed by clause 3 is not unreasonable by virtue of its geographical area.
27 As to the period in which the restriction is to operate, Mr Leslight gave evidence that the time restriction was determined by taking into account a number of factors. One was that the plaintiff's salespersons are required to have a detailed knowledge of its clients' property and requirements, which they begin to acquire as soon as the prospective vendor makes contact, typically with one of the salespersons, and are likely to continue to acquire during a sales process that may take up to 12 months. A normal exclusive agency agreement is for 90 to 120 days, during which time the salesperson maintains a close relationship with the vendor. After a period of exclusive agency, the vendor may continue on a non-exclusive basis.
28 My conclusion is that a restraint for a period of six months for a real estate salesperson placed in personal contact with clients the way the defendant was in this case, is not unreasonable by virtue of the duration of the restraint.
29 This is a case where the injunction is sought to enforce an express negative contractual stipulation, and therefore the equitable relief flows almost as a matter of course. However, to the extent that it is relevant to consider the issue, I am satisfied that damages would be an inadequate remedy. The restraint is in my view a reasonable restraint to protect the plaintiff's legitimate interest in preservation of its client base, for the destruction of which damages would not be sufficient compensation. There was some evidence given by the defendant to the effect that the licensee of his new employer had said she would not go near the plaintiff's clients or allow her staff to have anything to do with them. There is, nevertheless, reasonable ground for apprehension that in the absence of an injunction, the plaintiff's interest sought to be protected by clause 3 would be put at risk, having regard to the location of Countrywide's offices and the contacts the defendant was able to make whilst employed by the plaintiff.
30 The defendant submitted that I should exercise my discretion to refuse injunctive relief because the plaintiff had breached three provisions of the Award. It appears that on an occasion the defendant worked for nine consecutive days, in a manner that may have been contrary to clause 29 of the Award; he was not given a registered copy of the contract of employment contrary to clause 11; and he was not informed of the commission structure as required by clause 12. It was not submitted by the defendant's counsel that these non-compliances affected the validity of the agreement.
31 The plaintiff has given evidence to explain these matters. As to working for nine days, Mr Leslight said that the defendant was never asked or directed to work any extra days or in contravention of the Award, and was paid all monies due to him for the hours he worked. Mr Leslight said that the agreement was not registered due to an administrative oversight, although an application for registration with the Department of Fair Trading was made. As to the commission structure, Mr Leslight's evidence is that the defendant was made aware of the arrangements through open meetings with all staff, but he did not receive commission because the group commission target was never reached.
32 I accept Mr Leslight's evidence on these matters. My opinion is that, assuming there were breaches as alleged by the defendant, none of them was sufficiently serious to cause me, in the exercise of my discretion, to deny the plaintiff the equity it seeks, by way of enforcement of the defendant's contractual undertaking against him.
33 My conclusion, therefore, is that the plaintiff has established its entitlement to a final injunction to restrain the defendant from acting in contravention of the relevant part of clause 3 of the second agreement. I shall make an order that, for a period of six months from 10 August 2003, the defendant be restrained, directly or indirectly, on his own behalf or on behalf of or within association with others, from carrying on, being employed in or being in any way involved in any activity or business of providing the services of a real estate agency within the area from Bendalong in the north to Bawley Point in the south in the State of New South Wales, marked in yellow on Exhibit 1 to the affidavit of Milton William Leslight made on 19 August 2003. I shall hear the parties with respect to costs.
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