Was the restraint reasonable?
48There are a number of matters which, in my opinion, make the 5 year period of restraint a reasonable one.
49First, the nature of the business with its exclusive distributorship arrangement with the US company, together with the high salaries being paid points to a valuable business with substantial goodwill to protect. The evidence disclosed that there were only about 10 wholesalers and 1200 retail window tinters in the Australian market. The product itself was a large factor in the growth and prosperity of the business. It was a valuable business which was entitled to protection for a reasonable period of time after the departure of Mr Koulouris from the business.
50Secondly, Mr Koulouris was aware of the extent of the control that the US company had both with regard to changes in the control of Johnsons (clause 13.3.8 of the Distributor Agreement), the exclusive arrangement between the US company and Johnsons, and (at least from the time that negotiations started to sever the relationship between Mr Koulouris and Mr Hunter) the fact that the US company would insist upon a 5 year period of restraint of trade in the event that the 2 partners split. Although in the first instance Mr Koulouris's offer had stipulated that there would be no anti-competition clause in the sale agreement, he knew within a matter of days that that would be unacceptable to the US company and he knew instead what the US company would require.
51Thirdly, Mr Koulouris agreed to the 5 year period and agreed it was reasonable. That is a very important consideration, although not a determinative one, because it involves the exercise of a business judgment: Synavant at [85]. The business judgment is no doubt closely associated with the benefits received by Mr Koulouris and the alternatives available to him, which I will discuss presently.
52The Defendants pointed to the acceptance by Mr Hunter of the first proposal to settle put forward by Mr Koulouris in his email of 18 April 2007. Mr Hunter's explanation of why he accepted that proposal without any qualification was somewhat unsatisfactory. However, the evidence suggests that by the time Mr Hunter sent his acceptance he had already seen the long email of 21 April 2007 from Scott Davidson at Johnsons US. Mr Hunter said that he knew the US company would insist on a restraint, but that does not properly explain why he accepted Mr Koulouris's proposal without qualification. In that regard I found his evidence somewhat unsatisfactory. Nevertheless, that seems to me to be a side issue in a case concerning the reasonableness of the restraint that was ultimately agreed between the parties after further negotiation. Ultimately, Mr Koulouris was free not to accept the 5 year restraint. He had available other options including a winding up of the business, which he chose not to exercise. The starting point in relation to this matter, it seems to me, is that the parties agreed to a 5 year restraint and agreed that it was reasonable.
53Fourthly, Mr Koulouris received in total some $675,000 together with a release of his contingent obligations under guarantees that he had given to Johnsons. The Defendants point to 2 matters suggesting that the benefits Mr Koulouris received are not the equivalent of a restraint for 5 years. They point, first, to the salary that Mr Koulouris was receiving in the years before the Deed was entered into and suggest that what he received was worth something a little less than 2 years salary. However, the authorities do not appear to suggest an enquiry into the relationship between the period of restraint and any payout figure received by the person subject to the restraint. Rather, the applicable tests are those discussed in Koops, Stacks Taree and Hanna v OAMPS in the Court of Appeal and those tests can be appropriately adapted to a situation like the present. Mr Koulouris's departure is closely analogous to the departure of an employee. Indeed, it may be thought to provide a stronger case for a restraint bearing in mind his prior position and work within Johnsons.
54The Defendants also point to the figures in the draft document sent under cover of the 12 May 2008 communication from the Plaintiff's solicitors. The Consultancy Agreement provided for an arrangement of an overall payment of $1,279,200. The Defendants' submission seems to suggest that, whereas there had been an offer of $1.29 million, the final figure was considerably less at $600,000 (in fact $675,000), although the Defendants' submission did not take account of the release from the guarantees.
55The evidence did not disclose why the arrangement with the Consultancy Agreement and the Deed did not go ahead. What is significant, however, is that in the light of the obligations proposed in the Consultancy Agreement on GTS Films, the $1.29 million cannot be seen to relate simply to a payout figure of Mr Koulouris that subsequently was reduced to $675,000 together with the release of the guarantees. Although the two agreements were intended to be put into effect together, the basis in the documents for the payment of the figure was the consultancy obligations.
56Fifthly, I place some importance on the fact that both Mr Koulouris and Mr Hunter engaged solicitors to act for them in negotiating the Deed that was finally executed. It can reasonably be inferred that appropriate advice was given in relation to the amounts being received by Mr Koulouris, his other options and the restraint clause together with its validity.
57Sixthly, in the light of Mr Koulouris's role with Johnsons both before and after he established The Sign Division, I reject the submission of the Defendants that the appropriate starting point for the time of any restraint should be 1 July 2006 when Mr Koulouris commenced working separately in The Sign Division. The submission assumes, wrongly on the basis of the evidence, that Mr Koulouris did not continue to be actively involved with clients of Johnsons, during the time that he ran The Sign Division. That appears to be a relevant matter when considering the application of the appropriate test for reasonableness.
58In circumstances where this is not a restraint on a former employee who has left the business and a new employee would be coming in to take over the role of the departing employee, the appropriate test is the one adopted by McDougall J in Stacks Taree which concerned "the time required for severing the relationship between [Mr Koulouris] and those clients who would patronize the business after its sale": IRAF at [429]. I accept that the position is not on all fours with that decision because the present arrangement was the buy-out of one partner in a business. Nevertheless, the concern of the Plaintiffs was not for some replacement of Mr Koulouris to "show his or her effectiveness and establish a rapport with customers" ( Koops at [88]) but rather the concern for the severing of the relationship between Mr Koulouris and customers of Johnsons.
59Interestingly, and despite the test employed by Brereton J in Koops , the issue as he described it there was one of "customer connection" (at [28]). That is precisely the position here that forms the basis for the Plaintiffs' submission in justification of the restraint. As Brereton J said at [44]:
A more robust view is taken where the employee's role includes obtaining and extending custom for the employer's business. When an employee's duty includes to build up the employer's clientele as well as to deal with existing clients, a wide restraint is more likely to be upheld, because in such circumstances the employer is entitled to protection against the employee taking advantage of the period of service to prepare for later competition [ G W Plowman & Sons Limited v Ash [1964] 1 WLR 568; [1964] 2 All ER 10; Normalec Limited v Britton [1983] 9 FSR 318, 324; Dean, The Law of Trade Secrets , 2nd edn, [11.150]. In such a case, the establishment of a customer connection is not merely incidental to the employment, but its purpose. In that context, a covenant is considered reasonable, first, to remove the temptation that by cultivation of the target market during employment, the employee may prepare the ground for its exploitation by himself after the employment ends, rather than for his employer during the employment; and, secondly, to prevent exploitation after termination of the employment by the employee of a connection with the customer which the employer has paid the employee to establish for the employer's benefit. In this context in particular, the fact that in pursuance of his or her obligations under the employment contract an employee has for reward introduced customers who include relatives, friends and acquaintances does not [absent specific agreement to the contrary: see Sharah v Healey [1982] 2 NSWLR 223] remove or cut away the basis which would otherwise exist for a restraint.
60The evidence was that from 1999 to 2006 Mr Koulouris was the managing director of Johnsons. In that position he built a rapport with the clients. At the same time, Mr Hunter was primarily attending to two other businesses of his. It was only from 2006 that Mr Hunter allocated more of his time to the operation of Johnsons. As part of his regular meetings with Mr Hunter, Mr Koulouris had active knowledge of how Johnsons was trading and what it was doing.
61After Mr Koulouris established The Sign Division he had contact with a number of clients who were clients of Johnsons. Mr Koulouris continued to take orders from clients and place them with Mr Hunter or one of his sons. He continued to deal with enquiries from clients about window tinting and solar films. Whilstever Mr Koulouris was still receiving enquiries and placing orders for solar film with Johnsons when he ran The Sign Division which was, in any event, a part of Johnsons and carried on under the name of Johnson Professional Graphics, it would be inappropriate to take the view that time should begin to run for the restraint only when Mr Koulouris commenced to run The Sign Division.