First Plaintiff Second Plaintiff v First Defendant Second Defendant Third Defendant

Supreme Court of Victoria|2010-02-11|Before: JUDD J

INJUNCTION - Restraint of trade - Application to restrain plaintiffs from employing, soliciting or enticing away any employee of the applicant - Restraint contained in sale agreement for business - Whether the restraint was for the protection of goodwill of the business or a restraint upon employment - Scope of a valid restraint upon employment - Whether void provision of restraint clause could be severed - Application refused.

1 This is an application by summons dated 9 February 2010 brought by the defendants to a proceeding commenced by David James Allison and DJA (OBD) Nominees Pty Ltd, a related entity, in December 2009. Mr Allison is a chartered accountant. The first defendant carries on the business of accountants and consultants. Mr Allison was a director of the first defendant. The second defendant is the trustee of a unit trust in which the second plaintiff held units. The third defendant is a party to a sale agreement under which it acquired shares and units in entities which previously carried on the business in Melbourne.

2 The defendants' application was to restrain Mr Allison and his company, as respondents, from "giving effect to any contract of employment, soliciting or enticing away" from the applicants any employee for a period of two years from 1 December 2009. At the hearing of the application the applicants modified their application by reducing the period to six months. The injunction was sought until the hearing and determination of the proceeding or further order.

3 Mr Allison's employment with the applicants was terminated on 1 December 2009. He was also removed as a unit holder in the trust. In their proceeding commenced by writ filed 11 December 2009 and accompanied by a statement of claim, the plaintiffs seek declarations to the effect that an employment agreement and a unit holders' deed were repudiated by conduct of the board of BDO Group Pty Ltd when terminating Mr Allison's employment and removing him as a unit holder.

4 Since his termination Mr Allison has established a new firm and advertised for employees. He received responses from employees of the applicants and has already entered into employment agreements with five former employees, most of whom hold relatively junior positions with the applicants' business. There is one exception. Ms Popovic is regarded by the applicants as a critical employee because of her years of service with the BDO Group in its various emanations and because of her relationship with important clients.

5 The applicants say that they first became aware of the conduct complained of at the beginning of February 2010, at which time they set about preparing an application to the court. I note, only because it has been mentioned in the course of argument, that in the intervening period there had been a mediation which might explain some delay.

6 The applicants sensibly confined their case to one based upon a restraint imposed on Mr Allison by a sale agreement under which the third defendant acquired the business previously carried on by Mr Allison and others in Melbourne. In doing so they avoided the need to analyse the circumstances in which Mr Allison was terminated as an employee and unit holder.

7 The applicants maintained that an important element of the sale transaction, under which Mr Allison derived a significant financial benefit, was a restraint upon him from undertaking certain activities. The restraint forms part of the sale agreement which adopted a conventional form of cascading restricted areas and restricted periods in order to save the restraint should a court conclude that a restricted area or restricted period is unreasonable. Clause 16 relevantly provides:

16.2 Restricted Activities

The Restricted Activities are:

(a) subject to clause 16.5, carrying on, assisting, promoting or otherwise being engaged or concerned in any business or activity which is or may be competitive with the Business (whether as a member, shareholder, option holder, unit holder, director, consultant, adviser, contractor, manager, employee, associate, proprietor, trustee, beneficiary, servant, agent, principal, partner or in any other capacity whatsoever)

(b) canvassing, soliciting, inducing or encouraging or enticing away from the Business or the Buyer Group or accepting the custom of any client, customer, identified prospective customer, representative or agent or correspondent of the Business or the Buyer Group;

(c) employing, soliciting, engaging or enticing away from the Business or the Buyer Group any person who as at any time during the period of 12 months before those times was an officer, manager, consultant, or employee of the Business or the Buyer Group whether or not that person would commit a breach of contract by reason of leaving the Business or the Buyer Group;[1]

8 The applicants relied upon the observations of Dixon CJ in Butt v Long[2] where his Honour identified the special characteristic distinguishing the position of a purchaser of the goodwill of a business from that of an employer seeking to restrain competitive activity by an employee. His Honour said:[3]

A distinction is drawn between the position of the purchaser of the goodwill of a business taking a covenant in restraint of trade from his vendor and the case of the owner of a business taken such a covenant from his servant or apprentice. The goodwill of a business is immune from the danger of the owner exercising his personal knowledge and skill to its detriment and if the purchaser is to take over such goodwill with all its advantages it must in his hands remain similarly immune. Without, therefore, a covenant on the part of the vendor against competition, a purchaser would not get what he is contracting to buy, nor could the vendor give what he is intending to sell. The covenant against competition is therefore reasonable if confined to the area within which it would in all probability enure to the injury of the purchaser - per Lord Parker of Waddington (Herbert Morris Ltd. v. Saxelby (1916) 1 AC, at pp 708, 709).

The distinction is apt in this case. There can be no doubt that the purchaser of goodwill is entitled to reasonable protection of the goodwill. That is a matter which will be prominent in the mind of a court in deciding whether or not a restraint is enforceable.

9 The applicants maintain that there is a serious question to be tried as to whether Mr Allison breached the restraint in cl 16.2(c) of the sale agreement. They relied upon the affidavit of Pat Andrew Donato sworn 9 February 2010 and concessions, so it was said, made by Mr Allison in an affidavit filed today on behalf of the respondents. The applicants submitted that Mr Allison's employment of some former employees and intention to employ others carried with it a necessary inference that he had "solicited" or "enticed" employees away or proposed to do so if only by placing an advertisement on the internet.

10 The applicants relied on a broad definition of soliciting which included a circumstance where the initial conduct may not be initiated by the party bound by the promise. The primary thrust, however, of the applicant's case was to restrain the employment of identified persons who have already agreed to work for Mr Allison by entering into contracts of employment with him.

11 The respondents submitted that the restraint sought to be enforced by the applicants was unenforceable as invalid and contrary to public policy. They submitted that a restraint upon employment would rarely, if ever, be justified and drew to my attention the case of Kores Manufacturing Co Ltd v Kolak Manufacturing Co Ltd.[4] That was a case in which an agreement had been reached between two companies to the effect that they would not employ each other's former employees. The agreement was held to be invalid on the basis that it was not reasonable as between the parties.

12 Jenkins LJ, delivering the judgment of the Court of Appeal, set out the relevant legal principles and notedthey are uncontroversial. The principles may be summarised as follows.[5] A contract in restraint of trade is prima facie void. To be valid, such a contract must meet two conditions: (1) the contract must be reasonable as between the parties; and (2) it must be consistent with the interests of the public. In order for the first condition to be fulfilled, the restraint must afford no more than adequate protection to the party in whose favour it is imposed; to fulfil the second, it must in no way be injurious to the public. To determine whether the restraint affords 'no more than adequate protection', the court examines a further two issues: (a) against what was the protection required, and (b) why was the protection required?

13 The Court held that the agreement was void by reason of its failure to fulfil the first condition, reasonableness as between the parties. The agreement placed an indiscriminate restraint on all employees - no matter their experience, length of service, position within the company or possession of trade secrets or confidential information. This was held to be grossly in excess of what was necessary as an adequate protection. Having decided the case on the first condition, the Court left open the question of whether the restraint was void for failure to meet the public policy condition.

14 With respect to employer and employee restraints, the Court cited with approval Lord Parker of Waddington's observations in Herbert Morris Ltd v Saxelby:[6]

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 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 connexion or utilise information confidentially obtained.

15 Furthermore, the Court observed, in obiter, that 'an employer has no legitimate interest in preventing an employee, after leaving his service, from entering the service of a competitor merely on the ground that the new employer is a competitor.'[7] Therefore, an agreement between an employer and its employee to restrain the employee from entering the service of a competitor would, on its face, be invalid, requiring special circumstances in order to be valid.

16 Kores Manufacturing has been approved in a number of decisions including Esso Petroleum Co Ltd v Harpers Garage (Southport) Ltd[8] and Cactus Imaging Pty Ltd v Peters,[9] to mention only two. The High Court has noted that 'the courts in general take a stricter and less favourable view of covenants in restraint of trade entered into between employer and employee than of similar covenants between vendor and purchaser.'[10] The applicants, of course, contend that Mr Allison was not merely an employee, but a vendor as well. The employees who the applicants seek to retain are not bound by any restraint.

17 There is much to be said for the proposition that a restraint upon employment, affecting not only the would be employer but an employee not bound by a restraint, requires special justifying circumstances. The applicants do not attempt by their application to restrain competition - their application, if successful, will have the effect of preventing some of their employees from becoming employees of the respondents. It is difficult to envisage circumstances in which such a restraint would be enforced in the absence of a legitimate need to prevent Mr Allison from obtaining crucial confidential information or know how. Even then, to deny an employee the opportunity to apply his or her skills would be a serious matter. It is not suggested that the employees are likely to disclose confidential information. Mr Allison would, in any event, be expected to know all that might be regarded as confidential about the applicants' business.

18 The respondents further contend that whatever be the case concerning the reasonableness of the restraint, cl 16.2(c) of the sale agreement goes further than reasonably necessary and is not internally severable. They also argued that the beneficiary of the restraint was a different entity to the actual employer of the staff and thus had no legitimate interest in the continuity of staff employment.

19 In my view, at least for the purpose of this application, it would seem that the holding entities of the employer, as the party to the sale agreement, may well be in a position to establish that they have a legitimate interest in protecting the goodwill of the business by restraints on enticing and soliciting certain classes of employees.

20 The respondents submitted that cl 16.2(c), by its extended scope ('employing, soliciting, engaging or enticing away') and indiscriminate application was not reasonable and not severable. They relied on the decision of Dodds-Streeton J in I F Asia Pacific Pty Ltd v Galbally.[11] Her Honour's reasons were adopted and cited with approval by Hargrave J in Integrated Group Ltd v Dillon[12] where his Honour said:[13]

There are a number of examples in the reported cases of the courts looking askance at employers seeking to disclaim obviously unreasonable terms and to sever out reasonable terms in restraint provisions contained in the relevant employment contract. The cases were reviewed by Dodds-Streeton J (as she then was) in I.F. Asia Pacific Pty Ltd v Galbally.[14] In that case, Dodds-Streeton J accepted that there is 'a strictly circumscribed role for severance in the context of employee restraint covenants.'[15] Her Honour described the accepted approach to severance in a restraint of trade context as a 'narrow approach'. In doing so, her Honour accepted the classic statement by Younger LJ in Attwood v Lamont.[16] Younger LJ expressed the narrow approach in the following way:

The learned judges of the Divisional Court, I think, took the view that ... severance always was permissible when it could be effectively accomplished by the action of a blue pencil. I do not agree. The doctrine of severance has not, I think, gone further than to make it permissible in a case where the covenant is not really a single covenant but is in effect a combination of several distinct covenants. In that case and where the severance can be carried out without the addition or alteration of a word, it is permissible. But in that case only.[17]

The covenant in Attwood v Lamont sought to restrain the employee being in any way concerned in any of the trades or businesses conducted by the employer, being 'the trade or business of a tailor, dressmaker, general draper, milliner, hatter, haberdasher, gentlemen's, ladies' or children's outfitter'. This was a description of all of the businesses conducted by the employer. However, the employee did not work in all of those businesses. He worked only in the tailoring department. In these circumstances, the employer sought to have the court sever from the restraint clause all reference to trades or businesses other than that of a tailor. The Divisional Court agreed that this could be done by a process of severance. The Court of Appeal allowed the appeal. As a matter of construction of the restraint clause, it was held that there was 'in truth but one covenant for the protection of the respondent's entire business, and not several covenants for the protection of his several businesses'.[18] In reaching this conclusion, and insisting upon a narrow approach to severance in the context of restraint of trade clauses, Younger LJ referred to the statement of Lord Moulton in Mason's Case that severance:

ought only to be done in cases where the part so enforceable is clearly severable, and even so only in cases where the excess is of trivial importance, or merely technical, and not a part of the main purport and substance of the clause. It would in my opinion be pessimi exempli if, when an employer had extracted a covenant deliberately framed in unreasonably wide terms, the Courts were to come to his assistance and, by applying their ingenuity and knowledge of the law, carve out of this void covenant the maximum of what he might validly have required. It must be remembered that the real sanction at the back of these covenants is the terror and expense of litigation, in which the servant is usually at a great disadvantage, in view of the longer purse of his master.[19]

In I.F. Asia Pacific v Galbally,[20] Dodds-Streeton J echoed Lord Moulton's words in determining that severance was not appropriate in the case before her. Her Honour stated that the narrow approach propounded by Younger LJ in Attwood v Lamont:

cautions against curial disentanglement of unreasonably wide clauses, recognising that they may act in terrorem by exposing employees to the threat of litigation. Undue judicial readiness to save such clauses by severance reduces the sanction of invalidity otherwise applicable to employers who attempt to impose unjustifiably wide restraints.[21]

21 To support their opposite positions on severability, each party relied on cl 16.7 of the sale agreement which provides:

16.7 Severability

In this clause 16:

(a) each of the restrictions resulting from the various combinations of a Restricted Activity, Restriction Area and Restriction Period has effect as a separate and independent covenant and restriction;

(b) each of the Related Principals agree and acknowledge that each covenant and restriction is reasonable in the circumstances and necessary to protect the Buyer and the goodwill of the Business; and

(c) if any of those covenants and restrictions are or become invalid or unenforceable for any reason, they will be severed from this Agreement without effecting the validity or enforceability of any other covenant and restriction.

22 The applicants argued that cl 16.7 authorised a dissection of cl 16.2(c). The respondents argued that it did no such thing and, as a matter of construction, indicated an intention that severance within the sub-paragraph was not authorised.

23 In my view the applicants' case for a serious question to be tried is extremely tenuous. Clause 16.2(c) appears difficult to justify as a reasonable restraint. It is not readily severable. It is too general in its application. The applicants have not provided any basis to support a restraint on employment and the evidence of solicitation is tenuous, if non-existent. The evidence of Mr Donato and the so called "concessions" of Mr Allison do not give rise to a serious question to be tried that Mr Allison solicited or enticed employees from the applicants or proposed to do so.

24 The applicants' stated intention was to protect the goodwill of the business for only six months. This was to be achieved by interrupting Mr Allison's efforts to employ staff. The applicants did not seek to enforce cll 16.2 (a) or (b) by restraining Mr Allison from establishing his own practice and servicing former clients. These were matters expressly excluded from the scope of the application for injunctive relief. In their written submissions the applicants say the following:

BDO does not seek to restrain by injunction Mr Allison from establishing such a firm nor does it seek to restrain Mr Allison from competing with it for clients although BDO pursues such remedies as it has for such breaches and damages. However BDO does seek to enforce and by its injunction application restrain Mr Allison from breaching non-solicitation covenants in relation to existing employees of BDO.

25 In relation to employees who had already agreed to work for Mr Allison, the applicants proposed that they should remain on the applicants' payroll, even if not gainfully employed, for the duration of the injunction. Such a course was proposed notwithstanding the fact that the employees had demonstrated their intention to no longer remain in the employ of the applicants.

26 An unusual feature of this case, which reveals the indiscriminate scope of cl 16.2(c), is the defendants' decision to overlook Mr Allison's employment of his previous personal assistant, who gave notice to her applicant employer of her resignation on 11 January 2010. Her position was obviously regarded by the applicants as not worthy of their attention to restrain her employment by Mr Allison.

27 It was conceded by the applicants that it was the employment of Ms Popovic that lay at the heart of this application. When it became apparent that she proposed to leave the employ of the applicant she was offered a salary increase but declined. She is said to have a special client relationship and I have no doubt her departure would cause some disruption to the business of the applicants. She may fall into the category of one of those persons who the applicants wish to place in a state of limbo for a period of six months. In my view this application is designed to achieve, by the enforcement of cl 16.2(c) injunctive relief, an outcome the applicants elected not to pursue through the enforcement of cl 16.2(a)(b). They seek to interrupt Mr Allison's efforts to establish his own competing practice and service former clients of the defendants who wish to become his clients, by indirect means.

28 The applicants' approach to this application echoes, in my opinion, a fundamental problem with the enforceability of cl 16.2(c). Clause 16.2(c) does not discriminate between employees who may be critical to the applicants' business and those who may not. It is indiscriminate. It is not confined to employees who are in possession of confidential information, or who may be of particular importance because of their client relationships, or who may be engaged in long term projects that would cause major disruption if they were to leave the business or become employed by a competitor. It is a general restraint, without limitation as to type, quality, experience, seniority or otherwise of the employee.

29 The approach taken by the applicants also bears upon the balance of convenience. The applicants concede that damages are an adequate remedy in relation to the substantive allegations of breach by Mr Allison under cl 16.2(a) and (b), but have elected not to confine their claim to one for damages. Those alleged breaches go more directly to the possible impact on the applicants' business of Mr Allison establishing a competitive business. Why then is the relatively secondary activity of soliciting employees not amenable to be adequately compensated by an award of damages?

30 Having regard to the defendants' position in relation to the alleged breaches of cl 16.2(a) and (b), I am persuaded that damages would be an adequate remedy in relation to any breach of cl 16.2(c).

31 Furthermore, the interest of the employees, who have entered into contracts of employment, is important. They have demonstrated an intention to work for Mr Allison and not to be employed by the applicants.

32 The balance of convenience, in my opinion, favours recognition of the employees' desire to change their employment. There is also the fact that the application is, in truth, an attempt by the applicants to seek indirectly that which they have elected not to seek directly - to prevent Mr Allison from establishing his own practice and servicing former clients.

[4] [1959] 1 Ch 108 ('Kores Manufacturing').

[5] See also Lindner v Murdock's Garage [1950] HCA 48; [1950] 83 CLR 628; Geraghty v Minter (1979) 142 CLR 177.

[6] [1916] 1 AC 688, 709; also cited with approval in Lindner v Murdock's Garage [1950] HCA 48; [1950] 83 CLR 628, 635.

[7] Kores Manufacturing [1959] 1 Ch 108.

[10] Geraghty v Minter (1979) 142 CLR 177, 185.

At a glance

Court

Decision date

Before

Source

Judgment (54 paragraphs)

Parties

Cases Cited (3)