N E PERRY PTY LTD v JUDGE & ANOR No. SCCIV-02-633 [2002] SASC 312

2 The relationship between the plaintiff and AMJ was not to be one of partners, employer and employee, or master and servant.

3 During the term of the contract, AMJ was to use its best endeavours to promote and extend the goodwill of the clinic.

4 The remuneration under the contract was calculated by reference to the number of patients who visited the clinic.

5 The plaintiff was to provide non professional staff and other services at the clinic.

6 Clause 10 placed various restraints on AMJ during the contract and after it came to an end. It provides:

The Contractor acknowledges that he/she will be introduced to the client list relating to the Clinic. The Contractor agrees that in consideration of this Agreement they will not use the information contained therein for their own benefit and will not seek to induce any client at the Clinic to become a client of the Contractor for a period of 2 years following the termination of this Agreement. The Contractor agrees that they will not practice for two years within the township of Whyalla, or within a 30 km radius of the said practice in Schedule 4 (the Clinic)."

7 Clause 13 provided that either party could terminate the contract upon giving three months written notice to the other party. It was therefore possible at the time the contract was entered into that the term of the contract may be for as short a period as approximately three months.

The plaintiff sought relief in the nature of an injunction and an account of profits in relation to an alleged breach of what I will call the non practising covenant and alleged breaches of the non inducement covenant.

In relation to the non practising covenant there was no dispute that AMJ had established a chiropractic practice shortly after the contract had come to an end. The only question for the trial Judge was whether the restraint against practising for two years was invalid because it was an unreasonable restraint of trade. The trial Judge took the view that the restraint was reasonable as between the parties in terms of the activities prohibited and the geographical area, but that it was not reasonable as between the parties in terms of the duration of the restraint. The trial Judge would have upheld a restraint for a period of one year, but a restraint for a period of two years was unreasonable as between the parties. The trial Judge did not consider it necessary to reach a conclusion as to whether the covenant was reasonable in the interests of the public or, to put it another way, injurious to the public.

The trial Judge reached similar conclusions in relation to the validity of the non inducement covenant. However, he did go on to say that in any event there were no breaches of the non inducement covenant.

The Covenant against Practising as a Chiropractor

In Lindner v Murdock's Garage ("Lindner")[1] the High Court considered the validity of a restraint imposed on a motor mechanic in an employment contract between the motor mechanic and his employer. The contract was not for a fixed period and either party was able to terminate the contract by giving 21 days notice to the other. The geographical area of the restraint covered two country towns in South Australia, and it was in relation to the issue of the geographical area of the restraint that the High Court was divided. I do not think there was any disagreement between the members of the Court as to the relevant legal principles, and the case is a good starting point for the resolution of the issues in the present appeal.

The validity of a restraint is to be decided as at the date it is imposed. Subsequent experience under the contract is not to be taken into account. The question is,

"Whether the covenant was a reasonable one for the parties to agree at the outset of the service on the best estimate which they could then make of the future.[2]"

It has been said many times that to be valid a covenant must afford no more than adequate protection to the party in whose favour it is imposed.[3] In order to determine what is no more than "adequate protection", it is necessary to consider what it is for which protection is required, and what it is against which protection is required.[4]

"The answer is that they needed protection for their business connection against the possibility of its being affected by the personal knowledge of and influence over the customers which the appellant might acquire in their employment."

The interest that is protected is the goodwill of the covenantee's business, and the conduct that the restraint protects against is the covenantor exploiting his connection with the patients/clients of the business to diminish that goodwill. Therefore, the question is how long does the restraint reasonably need to be in order to sever the connection between Dr Judge and his ex-patients. In one sense, the other side of the coin is the time it will take for a replacement chiropractor to build or create a connection with the patients of the clinic such that the connection with Dr Judge is severed.

The trial Judge applied a test formulated by Professor H M Blake in an article entitled "Employee Covenants Not to Compete"[5] in the following terms:

"... duration is reasonable only if it is no longer than necessary for an employer to put a new man on the job and for the new employee to demonstrate his effectiveness to the customers."

There are some difficulties with this test. First, it is not clear what is meant by the word "effectiveness". The danger in the use of the word is that it may tend to focus attention on how long it is necessary for a chiropractor to prove that he can do the job, as distinct from how long a chiropractor needs in order to build up a relationship of trust and confidence with his or her patients. Secondly, the test focuses on what I have called the other side of the coin, rather than the correct test which focuses on how long it will take for the severing of the connection between Dr Judge and his ex-patients.

Having made these observations I should say that I do not think that the trial Judge's adoption of Professor Blake's test led him to identify and rely on any irrelevant matters, or to fail to identify relevant matters.

To my mind, the critical factual finding by the trial Judge is contained in the following passage from his reasons:

"As I stated earlier, although the evidence is limited, it does suggest that many of the patients received more than one treatment when consulting for a specific ailment. In these circumstances a period of one year would seem a reasonable time for the new chiropractor to demonstrate his or her effectiveness to patients. What evidence there is suggests that with the repeat patients the repeat visit or visits would occur within a short period of time and certainly well within a period of one year. If it could have been demonstrated that the practice involved only sporadic visits by patients, similar to an accountant's practice where the contact with the client may only be once or twice a year, then a longer period than one year may have been justified. In circumstances such as that a longer period would be required to demonstrate effectiveness (see: Smith v Ryngiel (1988) 1 QD R 179). The onus was on the plaintiff to prove that a two year period was reasonable. The evidence does not enable the plaintiff to satisfy that onus."

There was very little evidence before the trial Judge as to how frequently patients visited the clinic. Counsel for the appellant pointed to the following passages in the cross-examination of Dr Judge:

"Q How many people would you see generally a day when you were at Better Back?

Q I might sound incredulous. It just seems an enormous amount of patients.

Q This is the sort of level of work you did at Better Back for, let's say, the 12 months prior to 1 November 2001.

Q Some of those would be repeat visits and some would not.

Q Are there circumstances where you might only see somebody for one visit only.

A Usually people, who would be travelling around Australia, would call into the practice, have one visit, and then travel on. I think they're called transitional patients. They had a name for them.

Q I take it there is no pattern as to whether you see people two, or three, or four, or five times, it depends on the condition you're treating.

It seems to me fair to assume that, in a broad sense, a similar pattern existed at the time the contract was entered into.

Clearly, some patients visited the clinic regularly while others visited the clinic on an infrequent basis. Leaving aside what was probably a small number of transitory patients, in my opinion if it was established by direct evidence or by inference that a reasonable number of the patients visited on an infrequent basis, for example, a couple of visits followed by a period of 12 to 18 months before the next visit, then the restraint would be reasonable as between the parties. The fact that there was also a reasonable number of the patients who visited regularly within a 12 month period would not, to my mind, lead to the conclusion that a two year restraint provided more than adequate protection.

In the case of an accountant or a solicitor, a court may be prepared to infer that by reason of the nature of the work they carry out, a reasonable proportion of their clients visit on an infrequent basis. It may not be necessary to call a great deal of specific evidence as to the visiting patterns of clients.

In the case of a chiropractor, it seems to me that it must be possible to call evidence of the visiting patterns of patients either by general evidence of a chiropractor's practice and then applying that evidence to the specific case, or by calling detailed evidence of the visiting patterns of the practice in question.

The question here is whether the plaintiff's failure to call evidence as to the visiting patterns of patients means that the plaintiff has failed to satisfy the onus of establishing that the restraint is reasonable as between the parties.

In my opinion the matter is finely balanced. As I have said, it is clear that some patients visited the clinic on a very regular basis and others visited on a less frequent or irregular basis. Furthermore, considerable weight should be given to the fact that the parties themselves agreed that a two year period was appropriate. There is no suggestion that either party was in a position of disadvantage in terms of its bargaining power. Of course, what the parties themselves agree is by no means decisive.[6] It is only a relevant consideration, but I think that in a close case it should be given considerable weight.

Having said that, I note that there are about 22,000 to 23,000 people in Whyalla. As I understand it, at the relevant time there were two other chiropractic clinics operating in Whyalla, one at Whyalla Stuart and another at Whyalla Norrie.

On the basis of Dr Judge's evidence, he carried out in the order of 12,000 consultations per year. This evidence, although very general, suggests a large number of Dr Judge's patients were repeat patients who attended on a regular basis. This in turn suggests that a shorter period rather than longer period would be sufficient to break the connection between Dr Judge and his ex-patients.

Although this evidence is general and imprecise, it supports a conclusion that a one year restraint would be sufficient to provide adequate protection to the plaintiff.

A restraint against practising as a chiropractor within a defined area for a defined period is prima facie invalid. It may be upheld if the covenantor can establish that the restraint is reasonable as between the parties. Even if the covenantor can establish that the restraint is reasonable as between the parties, the restraint will be held invalid if the covenantee establishes that it is injurious to the public.

The evidence does not warrant a finding that a restraint of two years was necessary to provide adequate protection for the plaintiff. No evidence was put before the Court below to support a finding that the visiting patterns of patients to the clinic was such that a two year period was required to break the connection between Dr Judge and his ex-patients. Such evidence as there was, suggested the contrary conclusion. The plaintiff bore the onus but it did not discharge that onus. The restraint was not reasonable as between the parties.

Although there is no need for me to consider if AMJ established that the restraint was injurious to the public, it seems to me that on the evidence there is no reason to find that the restraint was injurious to the public.

In my opinion, the restraint against practising as a chiropractor is invalid.

There is one other matter which I should mention lest it be thought that it has been overlooked. Is the fact that the contract might have been terminated after only three months relevant to a consideration of the reasonableness of the restraint as between the parties?

The trial Judge did not think that it was a factor that needed to be taken into account. He considered that it was most unlikely that the contract would have been terminated at the end of three months. That was a finding that was not only open to him on the evidence, but in my opinion the finding was correct.

It may be noted that it is likely that it will often be the case that a contract which involves the provision of personal services (albeit through a company) will contain a clause which will enable either party to terminate the contract after a period of notice.

There are judicial statements suggesting that the fact that the contract may be terminated after only a short period is always relevant to the assessment of the reasonableness of a restraint clause[7] and there are judicial statements suggesting that the fact is rarely relevant.[8]

I think it can be safely said that the fact is irrelevant (or a factor to be given little weight) if, as in this case, there is a finding of fact to the effect that early termination of the contract was not seriously in the contemplation of the parties as being likely to happen. In Lindner, Fullagar J said at 650 - 651:

"The only point which has caused me any difficulty is the fact that the contract of employment is made terminable on twenty-one days' notice on either side. That the period of the employment may be a relevant matter in such cases as the present can hardly, I think, be doubted, but there is authority for saying that what must be taken to have been actually contemplated by the parties may be taken into consideration along with the actual terms of the contract itself. Moreover, it must always be borne in mind that an injunction is a discretionary remedy. In Haynes v Domain (1), where the agreement was terminable by a fortnight's notice on either side, Lindley M.R. said: "Possible cases in which the the (sic) restriction would not be reasonable are suggested. One would have arisen if the defendant had left the plaintiff's employ within a very short time after entering it, and before the defendant could have acquired or carried away with him any knowledge of the plaintiff's mode of conducting his business. Such an event has not happened, and clearly was not contemplated. This objection, if sound, would invalidate all agreements of the sort determinable on short notice, unless some words were introduced excluding their application to cases never contemplated. Another case to which the restriction could not be reasonably applied would have arisen if the defendant had left business altogether, or had had no dealings with the plaintiff's rivals for twenty or thirty years, and had then resumed business and assisted them". Romer L.J. (2) agreed with the above observations of the Master of the Rolls. The case of Haynes v. Doman (3) was decided before Mason v. Provident Clothing & Supply Co. Ltd. (4) and Herbert Morris Ltd. v Saxelby (5) but, when all the circumstances are regarded, I think that the decision is quite in line with Dewes v. Fitch (6), which was decided after the two leading cases in the House of Lords and in which a very similar covenant was held valid. In McPherson v. Moiler (7) where the agreement was terminable by a month's notice on either side, Harvey J. said: "I cannot altogether put out of consideration the fact that on the face of the agreement there was no security of employment for more than from month to month, though exactly what weight has to be given to that it is not easy in the present state of judicial authority to pronounce with any definiteness. The judgment of Lindley L.J. in Haynes v. Doman (8) and the judgment of Eve J. in Dewes v Fitch (6) both show that the Court may to a certain extent take into consideration what was probable as to the intention of the parties as to the length of the engagement ... Although the master has the power almost immediately to dismiss the employee, one has to look at the surrounding circumstances to see whether that was seriously in the contemplation of the parties as being likely to happen".

The best estimate of the future by the parties in this case was that the contract would run its full term. I think the approach taken by the trial Judge to this issue was correct.

I turn now to the prohibition on seeking to induce clients. For the reasons given by the Chief Justice I agree that the covenant against non inducement is valid.

The question whether the placing of the advertisement in the "Whyalla News" constituted a breach of the non inducement clause is not an easy one. It is not always easy to draw the line between what constitutes inducement and what does not.[9] On the one hand, ex-patients of Dr Judge will know that he was formerly at the "Better Back" Clinic and no complaint can be made of the fact that Dr Judge advertises the fact that he is in practice in Whyalla. Furthermore, potential clients of the clinic who may be influenced by the advertisement are probably not within the scope of a restraint which refers to any "client" (ie., existing client) of the clinic.

However, I think the conduct of AMJ, through Dr Judge, does fall within the concept of inducement because it draws, or attempts to draw, on the previous link between Dr Judge and the "Better Back" Clinic.

I agree with the Chief Justice that the plaintiff has established a breach of the non inducement covenant.

In my opinion, the covenant against practising for two years is invalid. The restraint against inducing clients is valid and enforceable. A breach of this restraint has been established.

I agree with the orders proposed by the Chief Justice.

[1950] HCA 48; (1950) 83 CLR 628.

Putsman v Taylor [1927] 1KB 637 at 643; Cited with approval by Kitto in Lindner at 653.

Herbert Morris v Saxelby [1916] 1AC 688 per Lord Parker at 708; Lindner, above n. 1 per Kitto J at 654.

Herbert Morris v Saxelby, above n.3 per Lord Parker at 708.

5

Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288 per Walsh J at 306 - 307; Gibbs J at 316 - 317.

Geraghty v Minter (1979) 142 CLR 177 per Gibbs J at 187; per Stephen J at 189 - 190.

See, for example, the remarks of Lord Herschell in Trego v Hunt [1896] AC 7 at 20.

[1] [1950] HCA 48; (1950) 83 CLR 628.

[2] Putsman v Taylor [1927] 1KB 637 at 643; Cited with approval by Kitto in Lindner at 653.

[3] Herbert Morris v Saxelby [1916] 1AC 688 per Lord Parker at 708; Lindner, above n. 1 per Kitto J at 654.

[4] Herbert Morris v Saxelby, above n.3 per Lord Parker at 708.

[5] (1960) Harvard Law Review 625 at 627.

[6] Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288 per Walsh J at 306 - 307; Gibbs J at 316 - 317.

[7] Lindner per McTiernan J at 644 - 645.

[8] Geraghty v Minter (1979) 142 CLR 177 per Gibbs J at 187; per Stephen J at 189 - 190.

[9] See, for example, the remarks of Lord Herschell in Trego v Hunt [1896] AC 7 at 20.