63 Heydon (at 127) points out that there are exceptions (1) where the employee knows all the customers; (2) in the case of an employee who may well in one way or another through the employment gain a special influence over or knowledge of the requirements of any of the employer's customers, whether he dealt with them or not; and (3) in respect of persons called on by a traveller in the hope of developing the initial contact later.
64 Thus in Stenhouse Australia Limited v Phillips [1974] AC 391, a restraint which prohibited solicitation of all clients of the employer was upheld, but on the basis that the employee as managing director was in a position to gain knowledge of and influence over every customer. Similarly, in Gilford Motor Company v Horne [1933] 1 Ch 935, a restraint prohibiting solicitation of all clients of the firm was upheld, where the employee had been the managing director and had the fullest opportunity of getting to know every customer of the company other than casuals. Restraints on acting for all clients of the firm were upheld in Sharah v Healey, and in Bridge v Dawes [1984] 1 AC 705, but they were partnership cases in which the mutuality of restraints between the partners was an important consideration.
65 In Plowman, in which a covenant not to solicit persons who had been customers of the plaintiff during the employment (whether or not serviced by the defendant) was enforced, on the basis that the plaintiff had an interest in maintaining its connection with discontinued as well as existing customers, and that the employee having been engaged as a sales representative dealing with farmers and market gardeners in a small agricultural community, he would likely be known as an employee of the plaintiff and might well gain a special influence over or knowledge of the requirements of any of the employer's customers, whether he dealt with them or not. Plowman was applied in Business Seating Renovations Ltd v Broad [1989] ICR 729, 733, but distinguished in Austin Knight (at 58), on the basis that in Austin Knight there was no ground for inferring that Miss Hinds was known to the two-thirds of the branch customers with whom she did not deal, far less that she acquired influence over or had knowledge of their special requirements.
66 Cases such as Stenhouse and Plowman show that a restraint may be reasonable even though it extends beyond customers with whom the employee has personal contact. This is so where, despite the absence of personal contact, influence may be established by, for example, seniority of the employee's position (as in Stenhouse); or where the employee's obligation involves developing the business within a target market (as in Plowman). If the employee has gained special knowledge and/or influence of customers or even of potential customers in the course of employment, a covenant may be reasonable notwithstanding that it extends to clients with whom the employee did not have personal contact. Once again, it must be borne in mind that this judgment has to be made when the restraint is taken, and not at the end of the employment, when the position may have evolved. And once again it is to be borne in mind that precise concurrence of the restraint and the legitimate scope of protection is not necessary.
67 I would infer that it was always envisaged that Mr Reeves would service personally some of Koops Martin's clients, who would be allocated to him for that purpose. With those clients, it was foreseeable that he would develop a close relationship involving special knowledge and influence. When a financial planner left, the firm circulated customers informing them of the replacement; in the case of at least one departure, the circular included a reference to Mr Reeves.
68 Koops Martin promoted a "team" approach to the delivery of financial planning services, and from time to time Mr Reeves received some assistance in respect of some of his clients from other financial planners, for example Mr Corkill, and vice versa. Mr Reeves agreed that they always worked as a team, but the extent of this seems to be that assistance would be provided in the background, and at a relatively low level; it did not involve the "assistant" having any contact with the client of the financial planner who was responsible for that client.
69 As has been mentioned, from early 2004 onwards, Mr Reeves was involved in presentations to clients, including clients primarily allocated to other financial planners, on behalf of Koops Martin.
70 This issue is finely balanced. It might be said in favour of validity that when the covenant was taken it was not unreasonable to think that Mr Reeves would acquire some knowledge of and influence over clientele more extensive than those who were serviced by him, and thus to take a covenant restraining solicitation and enticement of or dealing with clientele not limited to those for whom he was responsible. But he was not an overall manager of the business. His confidential relationships would be developed only with those clients who were serviced by him. The contact which he would have with clients other than those he serviced would be incidental, as part of the Koops Martin team, in a context where those other clients had a primary attachment to another financial planner in the team. For those clients, he was not the persona of the firm. Insofar as the restraint would have prohibited solicitation of customers of Koops Martin other than those he services, it was in the circumstances of this case excessive.
71 Ultimately, Mr Fernon did not press for an injunction in respect of customers other than those who Mr Reeves personally serviced.
Reasonableness - customers of other divisions of the Group
72 The first and third limb of the restraint - unlike the second limb, which is limited to customers of Koops Martin - refers to customers of the Group. In the context of the third limb, which is concerned with the preservation of confidentiality, this may be unobjectionable. But as to the first limb, the restraint prohibits solicitation not only of persons who were customers of the plaintiff financial services company, but also of persons who were customers of the rest of the Group - including its accountancy, mortgage broking and legal practices.
73 Even in the case of a single employer, a covenant which prevents the solicitation of customers of a different part of the employer's business from that in which the employee was engaged has often been held excessive [see, for example, Morris & Co v Ryle (1910) 103 LT 545; Attwood v Lamont; Morse v Fowler (1899) 44 Sol Jo 89; Heydon, 112-115]. The validity of a covenant which prohibits an employee from soliciting customers of the employer's related companies has been considered in a number of cases.
74 In Henry Leetham & Son v Johnston-White [1907] 1 Ch 322, Mr Leetham contracted as agent of a principal company and five subsidiaries with the defendant for him to serve the holding company or one of the subsidiaries. The defendant became the employee of one of the subsidiaries in its business. The restraint protected an area much wider than the business of the subsidiary, but reasonable if regard could be had to the combined business of the group. All six companies sued to enforce it; the Court of Appeal held that it was excessive and void, and that regard could be had only to the business of the subsidiary in which the defendant was employed. Farwell LJ said (at 327):-
In the same way it follows, to my mind, that a man whose business is a corn miller's business, and who requires to protect that, cannot, if he has also a furniture business, require the covenantee who enters into his service as an employee in the corn business to enter into covenants restricting him from entering into competition with him in the furniture business also, because it is not required for the protection of the business in which the man is employed, however much it may be beneficial to the individual person the owner both of the corn business and the furniture business.
75 Henry Leetham was applied in this court by Hope J in McGuigan Investments Pty Limited v Dalwood Vineyards Pty Limited [1970] 1 NSWR 686, where his Honour after citing extensively from Henry Leetham said (at 695-6) that its application to the case before him would result in the defendant not being entitled to support the covenant by reference to the business or interests of its fellow subsidiary, and that despite submissions that he should not apply it, the proper course was to do so and hold that the defendant was not entitled to justify the covenants otherwise than by reference to its own interests treating it as a separate entity.
76 Henry Leetham was distinguished by the Privy Council in Stenhouse, 404, where Mr Phillips had been the managing director of the plaintiff, which was the holding company of the group, the subsidiary companies being merely agencies or instrumentalities through which the holding company directed its integrated business and in the protection of the businesses of which it had a real interest. Those facts distinguished the case from Henry Leetham, in which the company with which the employee was employed had a limited business, whereas the restraint was expressed in far wider terms. That distinction is not available in the present case, where there is no suggestion that the financial services company controlled or coordinated the Group.
77 In Business Seating Renovations Ltd v Broad, the plaintiff was in the business of renovating office furniture, and it had an associated company in the business of manufacturing and selling new office furniture. The defendant was employed by the plaintiff in the renovation business, and covenanted not for one year to solicit from the plaintiff or any associated company the business of any customers during the year preceding termination. Millett J held the covenant valid in respect of customers of the plaintiff, but void in so far as it extended to customers of the associated company, who were merely potential customers of the plaintiff.
78 Generally, therefore, a restraint against the solicitation of customers of a company other than the employer is void, even though the companies are related, although there is an exception where the holding company effectively carries on business through the subsidiaries. Ultimately this is an emanation of the underlying principle which depends on special knowledge or influence over customers acquired in the course of employment: ordinarily, the employee of one subsidiary will not acquire such knowledge or influence in respect of clients of others, though a senior employee of the holding company might.
79 In the present case, although there is some evidence that clients were referred to the financial services practice from the accountancy and mortgage broking practices, there is no basis for supposing that Mr Reeves acquired any special knowledge of or influence over customers of those practices. He had no relevant connection with such clients of the Group, and a restraint that prevents him from soliciting or acting for them goes beyond what is necessary for the legitimate protection of Koops Martin's interests. To that extent, the restraint is unreasonable.
Reasonableness - acceptance of instructions
80 As has been observed, the second limb of the restraint prohibits not only solicitation and enticement of customers, but merely accepting instructions to act for them. Mr Russell submits that this is mere prohibition of competition.
81 Yet again, it is worth noting from Coote v Sproule that there does not need to be a precise concordance of the restraint and the legitimate interests of the employer.
82 It is well established that "territory" covenants may be upheld to preserve customer connection, though they will be closely scrutinised, even though they will have the effect of preventing acceptance of instructions [Lindner v Murdochs Garage, 650 (Fullagher J); Harlow v Byford, [40] (White J)]. Such a covenant is far more anti-competitive than one limited to prohibiting acting for former clients of the employer. A covenant against accepting business (as distinct from one merely against soliciting it) was upheld in Home Counties Dairies Limited v Skilton, and in Scorer v Seymour-Jones [1966] 1 WLR 1419, 1427. Covenants against acting for clients of the employee's former practice have been upheld in Sharah v Healey, Bridge v Dawes and Smith v Ryngiel.
83 One reason for accepting that a restraint on acting or accepting instructions is permissible is that it removes the difficulty of proof of actual solicitation, and the temptation to lay the groundwork for post-termination competition by surreptitious solicitation before termination. Similar reasoning has been held to support an employment restraint in aid of the protection of confidential information [Woolworths Limited v Olsen, [67]; Littlewoods Organisation Ltd v Harris [1977] 1 AllER 1472, 1479, 1485; Wright v Gasweld Pty Limited, 333; Kone Elevators Pty Limited v McNay (1997) ATPR ¶41-564, 44, 834].
84 But the more powerful reason is that, the stronger the customer connection which the employee develops, the less will solicitation be required; the strongest connections are those in which the client will follow unsolicited because of his or her connection with the employee, notwithstanding that that connection belongs to the employer. An anti-solicitation covenant is insufficient to protect an employer's customer connection in that context.
85 As already mentioned, there is strong evidence of such a connection in this case, and a "no dealing" restraint is no more than reasonable protection of the employer's interest in its customer connection.
Reasonableness - area
86 The territorial operation of the restraint is limited to the city of Coffs Harbour. Generally, the area within which a restraint operates is not relevant when it is one against solicitation of or dealing with customers (as distinct from one against engaging in business). Where a restraint prohibits solicitation of specific customers or classes of customers, no area limitation is generally required [Plowman; Smith v Ryngiel. Limitation in this case to the city of Coffs Harbour is not at all excessive.
Reasonableness - duration
87 In this case the restraint is expressed to operate for twelve months from the termination of employment.
88 Generally, the test of reasonableness for the duration of such a restraint is what is a reasonable time during which the employer is entitled to be protected against solicitation; that in turn depends on how long it would take a reasonably competent replacement employee to show his or her effectiveness and establish a rapport with customers [Stenhouse; Daly Smith Corporation (Australia) Pty Limited v Cray Personnel Pty Limited (NSWSC, Young J, 14 April 1997, unreported)]. A related albeit subsidiary consideration is how long might the hold of the former employee over the clientele be expected to last before weakening.
89 In the present case, some of the clientele are insurance clients. Insurance business is of an annual cyclical nature, and an advisor in that setting may well have contact with clients no more than annually. With investment clients also, annual contact is a typical pattern; Mr Reeves spoke to at least his major clients annually. Documentary evidence shows that reviews of clients' investments were planned for a year ahead. Annual contact with a client is a reasonable minimum standard, and supports the view that a twelve month restraint - which would allow a replacement employee to contact all clients and demonstrate his or her effectiveness and begin to establish a rapport - a reasonable opportunity to do so. It would also accord with the duration of the restraint that Mr Reeves has accepted with his new employer, MBT.
90 In my opinion, twelve months is no more than reasonable to allow Mr Reeves' replacement an opportunity to establish a rapport with and demonstrate his or her competence to clients, and thus a reasonable time for the operation of the restraint.
The validity issue - conclusion
91 Koops Martin has a legitimate interest founded in customer connection, which it was entitled to protect by requiring a reasonable post-employment restraint from Mr Reeves. The restraint taken went beyond what was reasonably necessary for the protection of that interest insofar as it prohibited soliciting or dealing with customers of Koops Martin who were not serviced by Mr Reeves, and insofar as it prohibited soliciting or dealing with customers of other divisions of the Group. But insofar as it prohibited acceptance of instructions from, as well as soliciting, customers of the financial services company who were serviced by Mr Reeves, it was reasonable, and it was not excessive in area or duration. To that extent, it is valid pursuant to Restraints of Trade Act, s 4(1).
The s 4(3) issue
92 Restraints of Trade Act, s 4(3), provides as follows:
Where, on application by a person subject to the restraint, it appears to the Supreme Court that a restraint of trade is, as regards its application to the applicant, against public policy to any extent by reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint, the Court, having regard to the circumstances in which the restraint was created, may, on such terms as the Court thinks fit, order that the restraint be, as regards its application to the applicant, altogether invalid or valid to such extent only (not exceeding the extent to which the restraint is not against public policy) as the Court thinks fit and any such order shall, notwithstanding sub-section (1), have effect on and from such date (not being a date earlier than the date on which the order was made) as is specified in the order.
93 Mr Russell submits that the court should order that the restraint be altogether invalid from the date on which the order is made. He submits that there has been a manifest failure to make the restraint reasonable, having regard to the circumstance that the principal of Koops Martin is a lawyer; that Mr Reeves was relatively inexperienced, young and entering his first job as a financial planner; and that Koops Martin did not raise or discuss the restraint clause with him, nor take any steps to make it reasonable, but instead has sought to enforce it to its full and literal effect.
94 Although s 4(3) has been discussed in a number of cases [Kone Elevators Pty Limited v McNay, ¶43, 828; Twenty-First Australia Inc v Shade; KA & C Smith Pty Limited v Ward (1998) 45 NSWLR 702, 727-8], counsel was not aware of any case in which it had been successfully invoked. Its purpose is apparently to encourage employers who create restraints to make a genuine endeavour at achieving reasonableness, by exposing them to the risk of invalidity, despite s 4(1), if they manifestly fail to do so. In this context, "manifest" means "plain" or "obvious". Another purpose of s 4(3) is to enable an application to be made by a person bound by a restraint prospectively to determine the extent of its validity before embarking on a course that might otherwise attract an application by the employer for an injunction.
95 Any application under s 4(3) involves two issues: first, whether there has been a manifest failure to attempt to make the restraint a reasonable one; and secondly, if so, whether (as a matter of discretion), any and if so what order as to invalidity should be made [Twenty-First Australia Inc v Shade].
96 The analysis above of the restraint in this case has concluded that it is excessive in two respects: in extending to customers of Koops Martin who were not serviced by Mr Reeves, and in extending to customers of other divisions of the Group. In the first respect, although I have concluded that the covenant is excessive, the contrary view was far from unarguable. In the latter respect, the position was less equivocal, but looked at as a whole, I do not think that the evidence establishes a plain or obvious failure to attempt to make the restraint a reasonable one. Moreover, there is no suggestion that Mr Reeves has accepted instructions from customers of other divisions of the Group, so that this aspect of the restraint appears of little practical significance. On this, the scope of activity left open to the employee, and the express statement that the restraint is not intended to prevent him from working for a similar business in Coffs Harbour, tells in favour of a conclusion that there was a genuine attempt to be reasonable.