(2) did what had been stipulated for exceed what was required for the protection of the covenantee, or alternatively for the protection of both parties?
50 His Lordship concluded at 164 that the respondent (covenantee) had a legitimate interest to protect. As the Lord Chancellor put it:
"He is the founder, or at least the possessor, of the business of an attorney. Such a business depends upon the existence of good will; upon the association and the intimacy which exist between him who carries on that business and the clients of the firm, and intimacy founded upon many complex considerations not easily to be defined, but very easily to be understood. Such a covenantee is taking into his employment in his firm a young man in circumstances which make it certain that the latter will acquire a close personal acquaintance with the clients from whom, and from whom alone, the business of the firm arises."
51 Thus, his Lordship said at 165, the respondent had a legitimate interest in ensuring that his business should remain his, and that on termination of the appellant's employment "the latter should not be in a position to use the intimacies and the knowledge which he had acquired in the course of his employment in order to create a practice of his own in that same place and by doing so undermine the business and the connection of the respondent".
52 Viscount Cave spoke to similar effect at 168 - 169:
"Here the practice to be protected is that of a solicitor, to which a goodwill is no doubt attached. It is manifest that a person employed in such a practice as managing clerk must in the course of his duties acquire a knowledge of the affairs, the documents and the disposition of the clients of the business such as to give him a special equipment which he could, if not restrained by contract, use in obtaining employment as their legal adviser and that in this manner the goodwill of the employer might be impaired and perhaps destroyed. Now the object being to protect the employer's business against the use of that special advantage, was it unreasonable to extend this covenant to the life of the employee? I think not."
53 I accept that the decision - in particular, the speech of Lord Birkenhead - identifies the principles and the relevant considerations of fact. I accept, too, their Lordships' reasoning process. But I have to say that I have some doubt as to whether the case would be decided in the same way today - at least, in this country. Competition law has moved a long way in the 90 -odd years since the dispute between Messrs Dewes and Fitch came before the courts. It might now be thought appropriate to give greater recognition to the public interest in ensuring competition, and hence efficiency, in the market for the provision of legal services.
54 There can of course be a problem with excessive reliance on decided cases. The question of validity of a covenant in restraint of trade (including, in this, a covenant against solicitation of the covenantee's customers or clients) is not really a question of law. Decided cases state the relevant principles, and may provide useful, indeed valuable, guidance as to their application in particular factual circumstances. But the validity of a covenant in restraint of trade is to be assessed having regard to the terms of the particular covenant and the facts of the particular case. See Evans LJ, with whom Nourse and Ward LJJ agreed, in Dawnay Day and Co Ltd v de Braconier d'Alphen [1998] ICR 1068 at 1111 - 1112.
55 Mr Condon laid stress on the judgments of members of the High Court of Australia in Lindner v Murdock's Garage (1950) 83 CLR 628. The respondent conducted a garage business at two towns in South Australia. It employed the appellant as a mechanic. The appellant agreed, among other things, that he would not:
"during his employment or within one year from the termination thereof in any way carry on or be engaged concerned or interested either personally or as a partner or as a servant or employee of any other person or company in the business of garage proprietors, motor and general engineers… or any other similar business now and hereafter carried on by the employers within the same area… nor in any way interfere with the employer's customers nor solicit their custom…".
56 In short, the appellant agreed both not to compete with the respondent and not to solicit its customers: a combination of restraints, Mr Condon submitted, not unlike those contained in cl 13.1 of the contract.
57 The High Court held, by majority, that the covenant was void because the geographical area of the restraint was wider than was reasonably necessary for the protection of the respondent's business. Latham CJ, who dissented in the result but whose statement of the principles was accepted by Webb J (at 647), explained why it was that an employer might reasonably require both a covenant against solicitation of customers and a covenant not to compete. His Honour said at 636 that an employee whose position brought him into close and personal contact with customers of the business might:
"establish personal relations with them of such a character that if he leaves his employment he may be able to take away from his former employer some of his customers and thereby substantially affect the proprietary interest of that employer in the goodwill of the business".
58 Thus, his Honour said, "a covenant preventing him from accepting employment in a position in which he would be able to use in his own advantage and to the disadvantage of his former employer the knowledge and intimacy with the customers which he obtained in the course of his employment should, in the absence of some other element which makes it invalid, be held to be valid". It was necessary, as his Honour pointed out, that each case should be considered "in relation to its own circumstances".
59 At 637, his Honour said that the agreement to protect the employer's interests:
"need not take the form of a covenant against solicitation. Such a covenant is difficult to enforce; it is difficult to show breach and difficult to frame an injunction. The master is entitled to protect himself by a covenant against competition, provided that it is not wider than is reasonably necessary to safeguard his proprietary interest against unfair use by the former servant of information gained during the service…".
60 McTiernan J, who was one of the majority, pointed out at 643 the public interest in some contracts in restraint of trade. His Honour said that if the law discouraged such agreements, employers would be very wary of engaging employees in what his Honour called a "confidential… capacity". I note, in passing, that a similar public interest was identified by the Lord Chancellor in Fitch at 165.
61 What Latham CJ said, as to the ability of an employer to protect itself by taking both a covenant against solicitation of customers and a covenant against competition, was picked up (without citation) by Doyle CJ in Rentokil Pty Ltd v Lee (1995) 66 SASR 301 at 304. His Honour said that an employer who has a protectable interest in goodwill or customer connection may protect itself both by a covenant against solicitation and by a covenant against competition. It was "well established", his Honour said, "that an employer may restrain a former employee from engaging in a business when to do so is likely to present an opportunity to behave in a manner which would infringe upon or damage the employer's protectable interest".
62 However, it is not in every case that the court will uphold both a covenant against solicitation and a covenant against competition. That situation was considered by the Privy Council in Stenhouse Australia Ltd v Phillips [1974] AC 391. Their Lordships' opinion was stated by Lord Wilberforce. His Lordship said at 403 that, in assessing the validity of a covenant against competition, it was relevant "that some protection has already been provided for the employer by the non-solicitation clause… . The presence of one restraint diminishes the need for others, or at least increases the burden of those who must justify those others".
63 It follows from those decisions that, where an agreement contains both a non-solicitation clause and a covenant not to compete, the reasonableness of the latter must be assessed by reference to the adequacy of the protection, for the legitimate interests of the covenantee, offered by the former. It will only be if the former does not provide adequate protection for the legitimate interests of the covenantee that the latter may be upheld. That assessment, although guided by statements of principle in decided cases and learned writings, requires close scrutiny of the particular facts of the case.
64 If it is found that the non-solicitation clause does offer sufficient protection, then it is likely that the covenant not to compete would be struck down. That is because, to adapt the words of Lord Atkinson in Herbert Morris at 702, it would be a covenant against "all competition per se"; and, in the particular circumstances, incapable of justification by reference to the legitimate interests of the covenantee.
65 If, however, it is found that the covenant not to compete should not be struck down because the nonsolicitation clause does not offer sufficient protection for the relevant interests, then the covenant not to complete is valid as between the parties. In those circumstances, as was pointed in, The Restraint of Trade Doctrine at 184, it would be unusual for the covenant in restraint of trade nonetheless to be struck down as against the public interest.
66 The last question of principle concerns the approach to be taken in assessing the reasonableness of the duration of a restraint (either on solicitation or on competition). That question needs consideration because the submissions, and much of the evidence, for Stacks Taree addressed the length of time that it would take to introduce Mr Phoon to Mr Tim Stack's clients and to promote him to the local business community, in the same way that Mr Marshall had been introduced and promoted. Mr Moses submitted that this was not the correct approach; and that the correct approach required consideration of the time that it would take to sever the relationship built up between Mr Marshall and the clients for whom he had worked.
67 For present purposes, the starting point may be taken to be the decision of Rath J in IRAF Pty Ltd v Graham [1982] 1 NSWLR 419. That case concerned a restraint in a contract of sale of a hairdressing salon. By that restraint, the vendor and his associates agreed that they would not for a period of three years from completion, and within a radius from one kilometre from the location of the business sold, be engaged directly or indirectly in the business of a hairdresser.
68 Rath J held that some aspects of the restraint were too wide, but that they could be read down by reference to s 4(3) of the Restraints of Trade Act.
69 His Honour dealt with the duration of the restraint at 428-429. At 429, he said that the most important consideration, in considering the reasonableness of the duration of the restraint, was "the time required for severing the relationship between the defendant [vendor] and those clients who would patronize the business after its sale". There was, as his Honour said, "necessarily a large element of conjecture involved here". It followed, his Honour said, that "considerable weight should attach to the period the parties themselves have selected".
70 His Honour's approach of considering the time taken to sever the covenantor's connection with the customers or clients in question rather than the time for the covenantee to build up (or rebuild) a connection, was followed by the Full Court of the Supreme Court of South Australia in NE Perry Pty Ltd v Judge (2002) 84 SASR 86. See Doyle CJ at 91 [28] - [30], Bleby J at 96 [63] and Besanko J at 103 [101] - [104]. Besanko J explained the reason for this approach at 103 [100], by reference to the judgment of Kitto J in Lindner at 654. Besanko J said that the interest being protected was the purchaser's interest in its business connection: preventing that connection from being affected by the personal knowledge and influence over the customers of the business which the vendor might have. (In fact, and of more relevance to this case, Kitto J put the matter in terms of a covenant given by an employee, and referred to knowledge and influence gained by the employee in the course of employment.)
71 Again, in Cream v Bushcolt Pty Ltd [2004] WASCA 82, the Full Court of the Supreme Court of Western Australia observed "that the most important consideration is the time required for severing the relationship between the vendor and those clients who would patronise the business after the sale". See Malcolm CJ (with whom Miller and McKechnie JJ agreed) at [53].
72 Of course, as Doyle CJ pointed out in Perry at 91 [31], there may be little practical difference between the two approaches. Nonetheless, his Honour said, "it is safer to focus on the period of time reasonably required to break the connection… rather than the period of time within which there would be an opportunity for [the employee] to establish a new connection."
73 Brereton J adverted to this question in Koops at [88], in a passage on which Mr Condon relied. His Honour there said that
"[g]enerally, the test of reasonableness for the duration of… a restraint… depends on how long it would take a reasonably competent replacement employee to show his or her effectiveness and establish a rapport with customers… . A related albeit subsidiary consideration is how long might the hold of the former employee over the clientele be expected to last before weakening".
74 It does not appear that his Honour was referred to the decision of Rath J in IRAF, or to the Full Court decisions that I have cited. In circumstances where there is some conflict in the approach taken by two judges at first instance in this Court (Rath J in IRAF and Brereton J in Koops), I think that it is open to me to consider the matter for myself. I prefer the approach of Rath J in IRAF, and I take into account that it has commanded the support of two intermediate appellate courts. Further, for the reasons given by Besanko J in Perry (see at [70] above), I think that the approach taken by Rath J and by the Full Courts of the Supreme Courts of South Australia and Western Australia accords with the principle on which restraints on trade are enforced.
First issue: duration of the restraint against solicitation
75 Although the issues refer to three separate controversies arising out of cl 13, that clause requires consideration in its totality. Many of the points raised in respect of (for example) the duration of the restraint imposed by cl 13.1(a) apply also to the question of whether that restraint should apply to all clients or only those for whom Mr Marshall had worked, and to the validity of the restraint under cl 13.1(c). Again, although aspects of Mr Tim Stack's evidence were said to relate to particular aspects of the restraint, substantial parts of that evidence were relied upon in submissions as bearing on the validity of the restraints generally. Accordingly, before turning specifically to submissions in respect of the first issue, I shall review the way in which the case for Stacks Taree was put and the salient aspects of Mr Tim Stack's evidence on which general reliance was placed.
The plaintiff's case
76 Mr Condon relied on a proposition derived from the judgment of Brereton J in Koops at [44]. His Honour there said that a more robust view of a restraint would be taken where the employee's role includes obtaining and extending the custom of the employer's business. That was so, his Honour said, 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". It was also intended to prevent the employee's exploitation, after termination of the employment, of customer connection established by the employee at the expense of the employer and for the benefit of the employer.
77 Mr Condon submitted that Mr Marshall had gone to Stacks Taree as a senior employee, who had prospects of advancement to the position of a director holding equity in the firm. He submitted further that Stacks Taree had invested substantial time and effort in promoting Mr Marshall to its clients and to the business community of Taree generally; and that the parties should be taken to have intended and understood, when the contract of employment was made, that this would happen. I accept those submissions. In my view, they state accurately the effect of the relevant evidence (and see at [23] to [26] above).
78 Mr Condon submitted further that Mr Marshall had become a "human face" of the business of Stacks Taree. I think that this is correct, in the sense that Mr Marshall was promoted to Taree, through the local press and otherwise, as one of the practitioners at Stacks Taree who would provide advice on commercial law and other matters (see, again, at [23] to [26] above). Mr Condon submitted that Mr Marshall had accepted this proposition. I am not quite sure that he did so (T31.48-32.8):
Q. And can I suggest that you appreciated that it was a significant selling point, if I can use that term, for the plaintiff that it retain someone of your calibre and your background, that is coming from a prestigious Sydney law firm?
A. Yes.
Q. And did you appreciate at the time that your background and expertise represented a significant selling point for the plaintiff in its business?
A. Yes.
Q. Not only in relation to the commercial work you performed, I suggest, but in relation to its practice generally; is that right?
A. I would assume so.