Stacks Taree v Marshall [2010] NSWSC 34 | Case summary

322946/09 STACKS / TAREE PTY LIMITED v ANTHONY JOHN MARSHALL JUDGMENT 1 HIS HONOUR: The first plaintiff, a solicitor corporation carrying on practice in Taree, seeks to enforce a restraint of trade clause in a contract of employment made with its former employee, the defendant. That contract of employment came to end on 27 November 2009. The defendant wishes to take up employment with another firm in Taree. The plaintiff says that he is prevented from doing so by clause 13 of the contract. 2 Clause 13 imposes three restraints. Each of them, by reference to the schedule to the contract, provides for a period of twelve months. The first restraint is against soliciting anyone who, during the first defendant's employment with the firm or at the date of termination of that employment, was a "Client of the Firm" as defined. A Client of the Firm is defined to mean someone who is at termination, or was during the preceding one year, a client of the firm. The second prohibition is against soliciting employees to leave the firm and related companies. The third is a prohibition on engaging in "Competitive Activity" as defined. The definition of Competitive Activity is "any activity which involves carrying on either alone, as a director or in partnership with any person or persons or as an employee of any person or persons the business or profession of a lawyer within ten (10) kilometres of the post offices at Taree or Wingham". 3 The defendant, without admissions, has offered an undertaking to the Court in terms of the second prohibition (being that against solicitation of employees). He has offered also an undertaking going part, but not all, of the way of the first prohibition (the solicitation of clients). As to solicitation of clients, the undertaking offered is for a period of six months only from termination of employment and is limited to any client of the firm for whom the defendant worked during the period of twelve months leading up to 27 November 2009. 4 The application was brought on for hearing during the vacation. For reasons that it is unnecessary to recount, I agreed to hear it urgently on a final basis. The parties cooperated in getting the matter ready for a hearing on a final basis. Because of the urgency attending the matter, the parties have agreed that, in circumstances where I indicated to them that I had formed a firm view as to the outcome and of the basic reasons why, they would agree to my giving short reasons and making orders, on the basis that I would publish detailed reasons in writing as soon as possible thereafter. 5 Accordingly, I shall not recount the evidence or the submissions; I will leave that to my detailed written reasons. In what follows, I have (to the best of my ability) taken into account relevant aspects of the evidence, and relevant submissions, all of which were fresh in my mind at the time I delivered these brief reasons. 6 The basis on which the restraints on trade can be justified is that they are no more than is necessary for the reasonable protection of the legitimate interests of the plaintiff. In this case, the legitimate interest that is identified is the plaintiff's interest, of a proprietary nature, in the goodwill of its practice. There is no doubt that the plaintiff has gone to considerable lengths to introduce the defendant to clients of the firm, and to market his services both to those clients and to the Taree business community more generally. It follows, in my view, that at least as a matter of principle, the plaintiff has identified a legitimate interest that is capable of being the subject of a restraint. 7 A restraint against solicitation is, in principle, unexceptionable. The object of such a restraint is to prevent the person subject to it from exploiting the connection which he or she has built up in the course of his or her employment by the covenantee. There is nothing remarkable in that. In the decided cases, the debate usually focuses on the extent, in terms of time, of the restraint. 8 In this case there is, as I have identified, an additional issue: namely, whether the restraint should be limited to clients of the firm for whom the defendant provided services, or whether it should be extended to clients generally. 9 On that subsidiary issue, I have come to the view that the legitimate interests of the plaintiff will be sufficiently protected if the restraint is limited to solicitation of clients of the firm for whom the defendant performed work, or to whom he provided legal services (which I think is the current jargon), over the period in question. There seems to be no dispute that the relevant period is the period of twelve months leading up to the cessation of the employment; I say that because of the definition of the expression "Client of the Firm", to which I have referred above. 10 The more difficult question is the duration of the restraint on solicitation. The plaintiff sought to justify the contractual duration (twelve months) by reference, among other things, to the time that it would take to train up and introduce to its client base (or the relevant part of it) the defendant's successor. The defendant submitted, I think correctly, that in principle the relevant test was not so much how long it would take for the plaintiff to train up a replacement but, rather, how long it would take to sever the connection between the defendant and the clients for whom he worked. The question was reviewed in the decision of the Full Court of the Supreme Court of South Australia, in N E Perry Pty Limited v Judge (2002) 84 SASR 86. All three members of the court accepted that the correct test was the time that it would take to sever the connection. See Doyle CJ at 91 [28] - [31]; Bleby J at 96 [63] and 98 [72] and Besanko J at 103 [100] - 104 [103]. Having said that, it should also be noted, as Doyle CJ pointed out at 91 [31], that, first, not much may turn on the point and, secondly, that the two tests may well lead to a similar outcome in practice. 11 In my view, there is much to be said for the proposition that the length of time taken to sever the connection is closely related to the length of time required to train up someone who can fill the defendant's place. Some of the evidence suggests that a minimum of six to twelve months would be necessary for that task; and other evidence suggests that a period of twelve months to three years might be needed. I discount the evidence insofar as it goes to the outer end of the range; but I think that the period of twelve months is justifiable on the evidence. That period has other things to support it. The first is that it is the period chosen by the parties in their contract, and some weight should be given to contractual choice, at least where there is nothing unreasonable on its face (see Mason P, with whom McColl and Bryson JJA agreed, in Woolworths Limited v Olson [2004] NSWCA 372 at [39]). 12 Another piece of evidence that lends some support to the choice of a twelve month restraint on solicitation of clients is that the defendant himself, when seeking to negotiate to escape some of the constraints put upon him, said that "obviously" he would be prepared "to abide by total restraint for twelve months so far as it relates to current clients of the firm and the firm's staff". It was accepted, I think, and in any event is plain, that this was said in relation to clause 13.1(a) and (b). 13 For those reasons, I think, a restraint in terms of clause 13.1(a) but limited to clients of the firm for whom the defendant performed work during the preceding twelve months, is no more than is justifiable to protect the legitimate interests of the plaintiff. I note that, to the extent clause 13.1(a) goes further, it may be read down pursuant to s 4(3) of the Restraints of Trade Act 1976 (NSW). 14 There was no dispute that a restraint, or undertaking to the Court in lieu, should be imposed or accepted in terms of clause 13.1(b). 15 I turn to clause 13.1(c). It will be observed that what is prohibited is not merely competition, within the ten kilometre radii of the designated places, in respect of clients of the firm but competition, within those areas, absolutely. To put it another way, an injunction in terms of clause 13.1(c) would prevent the defendant from providing legal services to anyone within the designated areas even if those persons were not during the relevant time, or for that matter had never been, clients of the plaintiff. 16 There is no doubt, and the authorities recognise, that in some circumstances it may be necessary, for the protection of the legitimate interests of an employer, to take a covenant in restraint of trade as well as a covenant against solicitation. That is because, it is well recognised, covenants against solicitation may be difficult to enforce. See, for example, the judgment of Latham CJ in Lindner v Murdock's Garage (1950) 83 CLR 628 at 637; and see also the judgment of McTiernan J in the same case at 643. However, an assessment of what is reasonably necessary in one case cannot be resolved only by looking at what has been held to have been reasonably necessary in other cases. The question is not really one of law; at most, it involves the application of principles established by cases, or guidelines appearing from those cases, to the facts of the particular case. In this case, it is argued that the difficulties in enforcing an undertaking or injunction in terms of clause 13.1(a) (whether modified or not) would be sufficiently great that the proper protection of the plaintiff's interests required a covenant against competition as well. 17 It was pointed out that many of the decided cases uphold the validity of covenants against competition where the competition is not limited to clients or customers of the employer entity. But in this case, I feel that I should take into account the circumstance that the defendant is a solicitor, and thus an officer of the Court. He has offered undertakings not to solicit. In the view to which I have come, he should be subject to a somewhat wider order not to solicit. I am not prepared to conclude that the defendant, as an officer of the Court (and, I should say, in general terms a person who appeared to me to be concerned to tell the truth to the best of his ability) would be likely to disobey an undertaking given to or order made by this Court. Accordingly, it seems to me, a blanket covenant against competition, which protects not only the plaintiff's legitimate interest in its own clients, but also competition in respect of those who are not, or have never been its clients, goes further, on the particular facts of this case, than is reasonably necessary for the protection of the plaintiff. 18 I note, in addition, that the evidence to justify the geographical extent of the restraint was minimal; and that the plaintiff put no submission that the area of restraint should be read down. (Nor was there much evidence to suggest what any proper but lesser area should be.) 19 For those reasons, I propose to make orders substantially in the terms of clauses 13.1(a) and (b) of the contract of employment restricted (in the case of paragraph (a)), to clients of the firm for whom the defendant worked during the 12 months preceding the termination of his employment.) I do not propose to make an order in terms of clause 13.1(c) of the contract. 20 I direct the parties to bring in short minutes of order to give effect to these brief reasons. That should be done by 10am tomorrow. [COUNSEL ADDRESSED ON COSTS.] 21 The defendant seeks an order for its costs. He submits that he has enjoyed substantial success. He points, further, to the undertakings offered by him to the Court. In the context of those undertakings, he points also to an offer made without prejudice save as to costs on 19 January 2010, in which further undertakings were offered. Alternatively, the defendant submits, he should have some 75 per cent of his costs. 22 The plaintiffs submit that there should be no order as to costs. They submit that each party has enjoyed a measure of success and failure. In addition, they point to a body of evidence coming from the defendant relating to alleged pre-contractual representations, which they were required to meet, but which did not feature at all in the way that the defendant's case was put before me. 23 The plaintiffs have undoubtedly achieved some measure of success, but a more substantial measure of failure. On the clause 13.1(a) restraint, they were successful in maintaining the period of 12 months, but unsuccessful in maintaining the application of the restraint to all clients of the firm. There was never any dispute as to clause 13.1(b) The plaintiffs were however unsuccessful completely on clause 13.1(c), and it was there that I perceive the real heat in the case arose. 24 The appropriate rule is that, in general, costs follow the event. In this case, the event is that the plaintiff has achieved some success. It may also be said that there is another event - namely, the failure of the claim for injunctive relief in terms of clause 13.1(c). 25 Although it is often said to be undesirable to attempt to separate out issues, and to take into account success and failure on those issues and seek to apportion costs accordingly, I do think that in this case the appropriate costs order requires recognition of the fact that although the defendant has succeeded on what I perceive to have been the main issue, he did not succeed on other - subsidiary but nonetheless important - issues. It cannot be said that those other issues were negligible.

Stacks Taree v Marshall

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