ASPL Pty Ltd v Rajakaruna
[2019] WASC 269
•26 JULY 2019
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: ASPL PTY LTD -v- RAJAKARUNA [2019] WASC 269
CORAM: SMITH J
HEARD: 19 JULY 2019
DELIVERED : 19 JULY 2019
PUBLISHED : 26 JULY 2019
FILE NO/S: CIV 2202 of 2019
BETWEEN: ASPL PTY LTD
Plaintiff
AND
PRIYANJITH SURANGA RAJAKARUNA
First Defendant
SNR GROUP (WA) PTY LTD
Second Defendant
Catchwords:
Interlocutory injunction ‑ Past employment restraint of trade clauses - injunction sought against ex‑employee senior professional accountant of accounting firm ‑ Whether confidentiality covenant void and enforceable past employment ‑ Blue pencil test considered ‑ Whether covenant prohibiting past employment interference with relationship of clients of ex‑employer has effect as covenant prohibiting competition ‑ Prima facie case not made out
Legislation:
Corporations Act 2001 (Cth), s 182, s 183, s 184
Rules of the Supreme Court 1971 (WA), O 52 r 1
Result:
Interlocutory injunction not granted
Category: B
Representation:
Counsel:
| Plaintiff | : | Mr J P Cook |
| First Defendant | : | Mr J C Yeldon |
| Second Defendant | : | Mr J C Yeldon |
Solicitors:
| Plaintiff | : | Mendelawitz Morton Commercial Lawyers |
| First Defendant | : | TGC Lawyers |
| Second Defendant | : | TGC Lawyers |
Case(s) referred to in decision(s):
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40
Birdanco Nominees Pty Ltd v Money [2012] VSCA 64; (2012) 36 VR 341
Brimstone Resources Ltd v Empire Resources Ltd [2018] WASCA 107
Castlemaine Tooheys Ltd v The State of South Australia [1986] HCA 58; (1986) 161 CLR 148
Emeco International Pty Ltd v O'Shea [No 2] [2012] WASC 348; (2012) 225 IR 423
Faccenda Chicken Ltd v Fowler [1984] ICR 589
Faccenda Chicken Ltd v Fowler [1987] CH 117
Integrated Group Ltd v Dillon [2009] VSC 361
Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449
Lindner v Murdock's Garage [1950] HCA 48; (1950) 83 CLR 628
Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026; [1977] 1 WLR 1472
Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535
Peters American Delicacy Co Ltd v Patricias Chocolates and Candies Pty Ltd [1947] HCA 62; (1947) 77 CLR 574
Planet Fitness Pty Ltd v Brooke Dunlop [2012] NSWSC 1435
Seven Network (Operations) Ltd v Warburton [No 2] [2011] NSWSC 386; (2011) 206 IR 450
Smith v Nomad Modular Building Pty Ltd [2007] WASCA 169
SST Consulting Services Pty Ltd v Rieson [2006] HCA 31; (2006) 225 CLR 516
Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110
Willhart Ltd v Samimi [2000] WASC 239
Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317
SMITH J:
Interlocutory injunction application – restraint of an ex‑employee – result
The plaintiff, ASPL Pty Ltd applies for an interlocutory injunction, pursuant to O 52 r 1 of the Rules of the Supreme Court 1971 (WA), to restrain the first defendant, Mr Rajakaruna, from breaching contractual clauses (confidentiality and non‑solicitation) and breaches of fiduciary duties.
In a chamber summons, filed on 9 July 2019, ASPL seeks interim orders restraining Mr Rajakaruna as follows:
(i)The first defendant be restrained and an injunction be granted restraining him whether by himself, his servants, agents or otherwise until the date that is 12 months from the making of this order from directly or indirectly, solely or jointly with any other person or legal entity, soliciting, canvassing, or approaching any person who was at any time from and including 26 February 2018 to and including 26 February 2019, a client of the plaintiff, with a view to obtaining the custom of that person in a business that is the same or similar to the business conducted by the plaintiff.
(ii)The first defendant be restrained and an injunction be granted restraining him whether by himself, his servants, agents or otherwise until the date that is 12 months from the making of this order from directly or indirectly, solely or jointly with any other person or legal entity, interfering with the relationship between the plaintiff and its clients, including without limitation thereto by providing any accounting services to any person who was at any time from and including 26 February 2018 to and including 26 February 2019, a client of the plaintiff.
In the chamber summons, ASPL also seeks restraining order against Mr Rajakaruna that is not expressed as an interlocutory or interim order in nature, namely, that:
The first defendant keep secret and not, at any time, for whatever reason, use, communicate or reveal to any other person for the first defendant's or anyone else's benefit, any information which is confidential to the plaintiff and/or the business of the plaintiff's clients, customers and suppliers which may have come to the first defendant's knowledge during the course of his employment ("Confidential Information") and use his best endeavours to prevent the use, publication or disclosure of that Confidential Information.
On 11 July 2019, after hearing the parties, interim orders were made substantially in the terms sought by ASPL in the chamber summons,[1] to have effect until the hearing of the chamber summons at 10.00 am, Friday 19 July 2019.
[1] The defendants did not oppose the making of the interim orders; ts 5, 11 July 2019.
For reasons that follow, I am not satisfied that ASPL has made out a prima facie case that further interlocutory restraining orders should be made. For this reason it is not necessary to consider the balance of convenience and I would dismiss the chamber summons.
The authors of the affidavits
ASPL read and relied upon the affidavits of:
(a)Julie Anne Cohen, sworn 8 July 2019; and
(b)Jonathon Peter Cook, sworn 10 July 2019.
ASPL also relied upon the affidavits that were read into evidence and relied upon by the defendants of:
(a)Priyanjith Suranga Rajakaruna, sworn 17 July 2019;
(b)supplementary affidavit of Priyanjith Suranga Rajakaruna, sworn on 18 July 2019;
(c)Roberto Amando Femia, sworn 17 July 2019;
(d)Johnny Martinovich, sworn 17 July 2019;
(e)Alfredo Giuffre, sworn 17 July 2019;
(g)Denis Burke, sworn 18 July 2019;
(h)Joe Germano, sworn 18 July 2019;
(i)Ilias Lee Riskas, sworn 18 July 2019;
(j)Mario Busacca, sworn 17 July 2019; and
(k)Richard Morrissey, sworn 18 July 2019.
Ms Cohen is a director and secretary of ASPL together with her husband Ivan Stanley Cohen. ASPL presently trades as Horizon Accountants and Advisory.
ASPL is owned by Cofam Holdings Pty Ltd a company owned and controlled by Mr and Ms Cohen. The owners of Cofam, the Cohens, are both accountants.
Mr Rajakaruna is the sole director, secretary and shareholder of the second defendant, SNR Group (WA) Pty Ltd. Mr Rajakaruna is a certified practicing accountant and was employed by ASPL until he resigned in early 2019.[2]
[2] Mr Rajakaruna provided notice of resignation on 29 January 2019 and his last working day was on 26 February 2019.
Mr Femia is a former director and shareholder of Allesandrino Scivolo Pty Ltd that had traded as ROCG Stirling. On 1 July 2016, Cofam purchased the business of Allesandrino Scivolo. Mr Femia was a former director and shareholder of ASPL before it was purchased by Cofam Holdings.
The remaining affidavits read into evidence on behalf of the defendants are sworn by former clients of ASPL, who are now clients of Mr Rajakaruna.
The evidence
The business of ASPL, acquired by Cofam on 1 July 2016, was first established in 1987.
Mr Rajakaruna commenced employment for Allesandrino Scivolo Pty Ltd on 12 June 2007 as a junior accountant. He reported to Mr Femia who was by that time a director and partner of Allesandrino Scivolo. Mr Rajakaruna signed a written contract of employment when he first commenced employment.
On 19 May 2015, Mr Rajakaruna signed a new contract of employment between himself as 'employee' and ASPL Pty Ltd ATF ASPL Trading Trust T/A ROCG Stirling as 'employer'. The material terms of the 2015 contract of employment entered into by Mr Rajakaruna and ASPL are as follows:
EMPLOYEE DUTIES AND RESPONSIBILITIES
…
5.2Employees must not engage in any paid or unpaid employment which might adversely affect the performance of their duties or their obligations to the employer, without the written permission of the employer.
5.3Employees must declare any interest in any business of any kind in which the employee may potentially be in conflict or in competition with the business of the employer.
…
CONFIDENTIALITY
21.1Employees acknowledge that in the ordinary course of their employment with the employer, they will be exposed to and learn information about the business and about clients, customers and suppliers, which is confidential and commercially sensitive; information which is not readily available to others and who are in competition with the employer and, information not generally available to the general public; which, if disclosed, may result in damage being done to the employer.
21.2Employees must therefore keep secret and not, at any time, either during employment or after termination, for whatever reason, use, communicate or reveal to any other person for an employee's or anyone else's benefit, any information which is confidential to the employer and/or the business of clients, customers and suppliers which may have come to an employee's knowledge during the course of their employment. An employee will use their best endeavours to prevent the publication or disclosure of this information.
21.3For the purpose of this agreement and by way of illustration, information which the employer regards as confidential is any information which concerns and/or relates to:
(a)The employer's clients and customers and details of the particular requirements and their business;
(b)The employer's suppliers and the particulars of their business and the nature of the relationship between the employer and the supplier;
(c)Costings, profit margins, discounts, rebates, projections and any other financial information relating to the business;
(d)Marketing strategies and tactics;
(e)Current activities and current or future business plans;
(f)Trade secret, technical information, drawing, know‑how, process, procedure and technique;
(g)Product or service information, including prices and commissions;
(h)Arrangements and agreements the employer has with third parties;
(i)Client and prospect information and lists;
(j)Concept not reduced to material form, design, plan and model; or
(k)Commercially sensitive information or any other information or data that employees know or become aware of, or generate, in the course of or in connection with their employment that the employees are told is confidential or that a reasonable person would expect from its nature to be confidential.
21.4The restrictions in clause 21 do not apply where:
(a)The use or disclosure of the confidential information is in the ordinary and proper course of the employee's employment with the employer;
(b)The employee is required by law to disclose the confidential information; or
(c)The employee has obtained the prior written consent of management to disclose the confidential information.
…
NON-SOLICITATION
26.1During an employee's employment, and for the period following the termination of employment set out in clause 26.2, an employee must not, without the prior written consent of the employer, directly or indirectly, do any of the following:
(a)Solicit, canvass, or approach any person who was at any time during the 12 months preceding the termination of employment, a client of the employer, with a view to obtaining the custom of that person in a business that is the same or similar to the business conducted by the organisation;
(b)Interfere with the relationship between the employer and its clients, employees or suppliers; or
(c)Induce or attempt to induce any employee of the employer to leave their employment.
26.2For the purpose of clause 26.1 the relevant period is:
(a)12 months;
(b)6 months;
(c)3 months;
26.3The employee acknowledges by accepting employment with the employer that they consider the restraints contained in this clause to be reasonable and intend the restraints to operate to the maximum extent possible.
26.4The employee and the employer intend the restraints contained in this Clause 26 to operate to the maximum extent.
26.5If these restraints:
(a)Are void as unreasonable for the protection of the interests of the employer; and
(b)Would be valid if part of the wording was deleted or the period or activity was reduced;
the restraints will apply with the modifications necessary to make them effective.
26.6The restraints contained in this clause are separate, distinct and several, so that the unenforceability of any restraint does not affect the enforceability of the other restraints.
…
28.1Employees are required to comply with all policies of the employer which may be in place from time to time. These policies do not form terms of an employee's contract of employment with the organisation and are not enforceable by employees.
In 2012, Mr Rajakaruna became qualified as a certified practising accountant.
In 2014, Mr Rajakaruna spoke to Mr Femia and asked him if he (Mr Rajakaruna) could apply for a tax agent licence. Mr Femia agreed and signed the necessary forms for Mr Rajakaruna to become a registered tax agent by the Tax Practitioners Board.
To charge clients for taxation services all accountants or their entities must be registered with the Tax Practitioners Board and each tax agent is given a personal identification number. On receipt of the identification number the tax agent can then add their client to their client list with the Australian Taxation Office (ATO) through the ATO website based tax agent portal.[3]
[3] Affidavit of Julie Anne Cohen, sworn 8 July 2019 [73] – 76].
After receipt of a tax agent licence, Mr Rajakaruna asked Mr Femia for permission to prepare tax returns for his family and friends from home.
Mr Femia, in his affidavit, deposes that Mr Rajakaruna explained that his family and friends were asking for assistance with their returns and that there was 'no way' that they would otherwise go to an accounting firm to have their tax returns completed.[4] Mr Femia agreed with Mr Rajakaruna's request because the 'focus' of ASPL was medium to large corporations and business.[5]
[4] Affidavit of Roberto Amando Femia, sworn 17 July 2019 [9] – [10].
[5] Affidavit of Roberto Amando Femia, sworn 17 July 2019 [11].
Mr Femia explained to Mr Rajakaruna that he had no problem (with Mr Rajakaruna) carrying out the work for family and friends so long as the work did not affect his work at the practice in any way and they discussed if any business client's came to Mr Rajakaruna he would refer them to ASPL.[6]
[6] Affidavit of Roberto Amando Femia, sworn 17 July 2019 [13] – [14].
Mr Femia regarded Mr Rajakaruna as a very good worker who worked after hours and weekends and Mr Femia was confident at the time he gave his consent that Mr Rajakaruna would continue to prioritise the interests of the practice.[7]
[7] Affidavit of Roberto Amando Femia, sworn 17 July 2019 [12].
It is also Mr Femia's evidence that after he gave permission to Mr Rajakaruna to carry out this work that Mr Rajakaruna did refer clients to the practice and continued to generate business for the firm by offering new services to existing clients and bringing in new clients to the business.[8]
[8] Affidavit of Roberto Amando Femia, sworn 17 July 2019 [17].
In Mr Rajakaruna's first affidavit his evidence is that he completed the extra work for family and friends after hours and on weekends, and the work was only undertaken for the completion of income tax returns for his family and friends which he carried out for a maximum fee of $100.[9]
[9] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019 [16].
Annexed to the first affidavit of Mr Rajakaruna is a list of the SNR clients which records 54 client names, all of which are individuals with the exception of three trustees. Two of those trustees appear to be trustees associated directly with Mr Rajakaruna and the other is a trustee for the Flemming Family trust.[10]
[10] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019, annexure RR‑2, pages 12 – 13.
Mr Rajakaruna's evidence is also that:[11]
(a)in June 2016 he set up the company SNR Group (WA) Pty Ltd and a trust, through which he completed the returns of his family and friends and that this company and trust was set up by him for the purpose of doing this work;
(b)he charged a small fee from his family and friends in order to cover his expenses (eg software, insurance and registration etc.) and to demonstrate to the ATO that he was not receiving any other benefit for preparing tax returns; and
(c)he has not made a profit through SNR and that the total amount of gross fees he generated through SNR from 1 July 2016 to the date of his resignation with ASPL is $29,000 in total.
[11] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019 [17] – [20].
By the time Cofam purchased the business of ASPL Mr Rajakaruna was a very competent, experienced accountant and tax advisor and held a senior role in the business.
After the purchase of the business of ASPL, Mr Femia continued to work in the business as an employee until 2018.
It appears that at all material times Ms Cohen was not aware that Mr Rajakaruna, whilst employed by ASPL, was carrying out work on his own account.
It is clear from Ms Cohen's affidavit that Mr Rajakaruna worked very closely with Mr Femia and reported directly to him.
In February 2018, Mr Femia became unwell and did not return to work. Mr Rajakaruna took over Mr Femia's position which included Mr Femia's client base and leading the team of accountants. In this position, Mr Rajakaruna had access to the whole data base of the clients of ASPL.
On 29 January 2019, Mr Rajakaruna resigned from his employment with ASPL giving one month notice to take effect on 26 February 2019. Mr Rajakaruna's evidence is that he resigned for two reasons. These are as follows:[12]
(a)part of his role at ASPL (when trading as Horizon) was to review work that had been completed by junior and senior accountants in the firm. He began to spend much of his time correcting errors that he found in the work. He also received complaints from clients about errors. After complaining to Ms Cohen he observed that there was no improvement in the work he reviewed and found that he was spending an increasing amount of time reviewing letters of administrative staff and other accountants to ensure a high standard; and
(b)he formed the opinion that his complaints to Ms Cohen about errors he was finding in the work were going unheard as Ms Cohen told him (words to the effect that) he was spending too much time reviewing work which was not in the commercial interests of the firm, and that clients would not be concerned about errors in letters or the manner in which letters were written, all they would be worried about was whether they were receiving a tax refund or had tax payable.
[12] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019 [30] – [36].
After Mr Rajakaruna submitted his resignation, Ms Cohen subsequently met with him on a number occasions to put in place transitional arrangements. During those meetings they reviewed the list of clients of ASPL and discussed each client in detail.
It is Ms Cohen's evidence that among the matters discussed were the details of the history of the client's business, the client's family and other links to other clients in the database. Ms Cohen said this was done to determine which accountant should take responsibility for each client.[13]
[13] Affidavit of Julie Anne Cohen, sworn 8 July 2019 [57].
During February 2019, ASPL sent a letter to 85 groups of clients that Ms Cohen says were specifically identified by Mr Rajakaruna as crucial to the handover.[14]
[14] Affidavit of Julie Anne Cohen, sworn 8 July 2019 [58].
The letter informed clients of Mr Rajakaruna's departure from ASPL. In the letter (signed by Mr and Ms Cohen, and by Mr Rajakaruna) clients were informed:[15]
I am writing to you, to let you know that I will be leaving my employment with Horizon Accountants & Advisory on 26th February, 2019. I have spent much of my professional career at Horizon, and its previous incarnations, and have decided that it is time for me to explore new opportunities and further my career.
I have enjoyed and appreciated the opportunity to work with you over the years. I hope that I have managed to help you in achieving your business goals.
The team that I have worked with at Horizon has a wealth of knowledge and experience and they will continue to assist you to achieve your business goals. The firm has also appointed Paul Griffiths, who will be commencing on 13th March as Associate Director.
Paul is a Chartered Accountant (CA) and SMSF Specialist with over 20 years experience in Taxation, Superannuation and Business Advisory and will be leading our existing team. His email address is [email protected].
Please expect a call from Paul during March.
If you have any questions or concerns, please feel free to contact either of the Principals Julie Cohen or Ivan Cohen.
[15] Affidavit of Julie Anne Cohen, sworn 8 July 2019, annexure JAC12, page 132.
On Friday, 22 February 2019 Mr Rajakaruna met with the Cohens and, among other matters, discussed the terms of the 2015 contract, and in particular clause 26 – No Solicitation. Ms Cohen's evidence is that at that meeting Mr Rajakaruna stated that he was not going to solicit clients.[16]
[16] Affidavit of Julie Anne Cohen, sworn 8 July 2019 [68] – [69].
In May 2019, it came to Ms Cohen's attention that Mr Rajakaruna was registered as a tax agent and that one of ASPL's clients, the Morrissey Family Trust had disappeared from the tax agent portal of the ATO.[17]
[17] Affidavit of Julie Anne Cohen, sworn 8 July 2019 [72], [82].
When Ms Cohen added the client back to the tax agent portal she discovered that the postal address for the Morrissey Family Trust was recorded as a post office box in Joondalup. Ms Cohen also ascertained that:[18]
(a)the post office box in Joondalup was the current address for the service of documents of SNR Accounting;
(b)the name of SNR Accounting was registered to Mr Rajakaruna from 20 May 2014 to 15 October 2016;
(c)Mr Rajakaruna was registered as an individual tax agent on 9 April 2014; and
(d)SNR was incorporated on 15 June 2016.
[18] Affidavit of Julie Anne Cohen, sworn 8 July 2019 [86] – [92].
On 6 June 2019, the client for the Morrissey Family Trust informed ASPL that they had 'made other arrangements'. By this statement it is clear that Ms Cohen understood that the Morrissey Family Trust had ceased to be a client of ASPL.[19]
[19] Affidavit of Julie Anne Cohen, sworn 8 July 2019 [85].
In her searches, Ms Cohen located a website for SNR Accounting (which has one page only). The website displays the address of the post office box in Joondalup that is the same as the post office box for the Morrissey Family Trust entered into the tax agent portal.
In her affidavit, Ms Cohen provides an excerpt of the web page for SNR Accounting, which states:[20]
SNR Accounting is a specialist practice delivering accounting, taxation and self managed super fund services to individuals and businesses of all sizes. From fast and accurate tax preparation services to reliable bookkeeping and accounting support, SNR Accounting is committed to delivering the highest quality service each and every time for each and every client.
[20] Affidavit of Julie Anne Cohen, sworn 8 July 2019 [101].
Ms Cohen also located a Facebook page for SNR Accounting and subsequently accessed the tax agent portal for all ASPL clients. Ms Cohen ascertained that 18 clients had recorded addresses in the tax agent portal as the same as the Joondalup post office box displayed on the SNR webpage.[21]
[21] Affidavit of Julie Anne Cohen, sworn 8 July 2019 [102] – [106].
At the time of swearing her affidavit on 8 July 2019, Ms Cohen had been advised that 29 groups of clients had either notified ASPL that they were no longer a client or had requested that ownership of their online accounting file be transferred back to them.[22] Some of these clients requested copies of the prior year's tax returns and statutory documentation and some had informed ASPL that they needed this documentation to obtain finance.
[22] Affidavit of Julie Anne Cohen, sworn 8 July 2019 [111].
It is notable, however, that:
(a)Ms Cohen does not depose as to over what period of time the loss of clients had occurred; and
(b)ASPL's statement of claim only names 18 client entities that were clients of ASPL (within the 12 months preceding 26 February 2019) are registered on the tax agent portal as having their address as the Joondalup post office box.[23]
[23] Statement of Claim annexed to Writ of Summons filed 9 July 2019 [47].
Mr Rajakaruna does not dispute that ASPL have lost clients or that some former clients of ASPL have now become clients of his.
However, Mr Rajakaruna disputes that SNR has carried out any work for any former clients of ASPL.
Mr Rajakaruna's evidence is that:[24]
(a)the Joondalup post office box is registered to him personally, but is used for SNR correspondence for ATO notices of assessment for his family and friends and is shared with his new business;
(b)he set up the website for SNR Accounting and that while the website advertises for individual and businesses, he had an agreement with Mr Femia to refer all business clients to ASPL. He did not advertise the website and did not apply search engine optimisation or any other service to promote the website;
(c)the most recent post on the Facebook page for SNR Accounting was published on 12 July 2016 and there has been no activity on the page since then and all 32 followers are family and friends; and
(d)he set the Facebook page up with the intention of sharing tax related information to his family and friends but he never got around to doing that.
[24] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019 [61], [69] – [77].
Mr Rajakaruna's evidence is that after he resigned from ASPL he attended a few job interviews and at the same time clients who had received a letter regarding his resignation made contact with him to find out where he had gone.[25] Some of the clients contacted him by telephone as they had his mobile number; others were given his phone number by clients who had his contact details; others contacted him via social media and he bumped into some ex‑clients at the shops.[26]
[25] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019 [43] – [44].
[26] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019 [45].
Those clients, who contacted Mr Rajakaruna when he resigned, told him that they wanted to follow him wherever he went, whether that was to a new employer or to his own business.[27]
[27] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019 [46].
Subsequently, in weighing up his options, Mr Rajakaruna decided that he should start a business and so started a new business (rather than service clients through SNR because SNR existed purely to look after his family and friends and he wanted to keep that business separate).
Mr Rajakaruna points out that Ms Cohen has not specified what confidential information that he has used or how he has used it.[28] He, however, concedes that he knew certain information about clients, which he obtained through the course of his employment with ASPL in order to complete their work.[29]
[28] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019 [78].
[29] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019 [79].
Mr Rajakaruna's evidence is that after his employment was terminated clients sought him out due to their relationship with him and his professional knowledge, expertise and reputation. He is now servicing those clients and the (client) information that he has is information that belongs to those clients and has been provided to him by each client so that he is able to complete their work and they have requested that he use that information to do so.[30]
[30] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019 [81] – [83].
It is also Mr Rajakaruna's evidence that he has no records of the plaintiff's clients or customers and does not know their particular requirements. He is not aware of the costing of the plaintiff's business or aware of discounts, rebates or projections or any other financial information of the plaintiff's business and he was never given access to the plaintiff's bank account records. Mr Rajakaruna says that he does not know what activities the plaintiff had planned for its clients and customers and he has no knowledge of any details of financial products being promoted by the plaintiff's business or their commission or prices.[31]
[31] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019 [86] – [89].
Mr Rajakaruna does, however, say that he did receive some referral fees from Mr Cohen for life insurance customers that he brought to him.[32]
[32] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019 [89].
Of the 18 client entities referred to in the statement of claim as client entities of ASPL, there are eight persons who own or control 15 of those entities and each of these eight persons have sworn affidavits on behalf of Mr Rajakaruna.
In each of the affidavits of the former clients of ASPL each person attests that, after learning that Mr Rajakaruna was leaving ASPL, they contacted Mr Rajakaruna (after he had left his employment with ASPL) and told him that they wanted him to do their accounts.
In each of the affidavits, the deponent clearly states that Mr Rajakaruna made no contact with them or approached them for their business.
The evidence of Mr Martinovich and Mr Germano is that when they contacted Mr Rajakaruna he explained that he had restrictions that stopped him from approaching or soliciting clients.[33] In both affidavits the deponents state that after they were informed of this information they responded by saying to Mr Rajakaruna that they were approaching him and they wanted him to do their accounts.[34]
[33] Mr Germano initially contacted Mr Rajakaruna in February or March 2019 and Mr Rajakaruna told him he had some job interviews lined up. Mr Germano contacted Mr Rajakaruna again in April 2019.
[34] Affidavit of Johnny Martinovich, sworn 17 July 2019 [13] – [14]; affidavit of Joe Germano, sworn 18 July 2019 [13] – [14].
Mr Guiffre attests that he was disappointed to hear that Mr Rajakaruna was leaving ASPL and that he was not happy with the service provided by ASPL and wished to be free to choose who should do his accounts.[35]
[35] Affidavit of Alfredo Guiffre, sworn 17 July 2019 [9], [17]; Mr Guiffre contacted Mr Rajakaruna in or about April 2019.
Mr Burke[36] and Mr Germano also expressed similar opinions in their affidavits. Mr Burke's evidence is that he did not intend to remain a client of ASPL and would follow Mr Rajakaruna wherever he went.[37]
[36] Mr Burke contacted Mr Rajakaruna in or about April 2019.
[37] Affidavit of Denis Burke, sworn 18 July 2019 [13].
Mr Riskas'[38] and Mr Busacca's[39] evidence is that if they had not taken their business to Mr Rajakaruna they would have taken their business to another accountancy business after Mr Rajakaruna left.
[38] Mr Riskas contacted Mr Rajakaruna at the end of March or early April 2019.
[39] Mr Busacca contacted Mr Rajakaruna to find out where he was going.
Mr Riskas also states that Mr Rajakaruna was an excellent accountant and he wished to follow him when he left ASPL.[40]
[40] Affidavit of Lee Riskas, sworn 18 July 2019 [19].
Mr Morrisey did not wish to remain a client of ASPL; did not wish to meet with a new accountant at ASPL; and he sought out Mr Rajakaruna in May 2019 to engage him to do his accounts. Mr Torre's evidence is substantially the same.[41]
[41] Affidavit of Richard Morrisey, sworn 18 July 2019 [7] – [11]; affidavit of Almando Torre, sworn 17 July 2019.
ASPLs' causes of action
The claims made by ASPL in the statement of claim, filed on 9 July 2019, can be distilled as claims that:
(a)From about 19 May 2015 and for the duration of his employment Mr Rajakaruna breached his fiduciary duties as an employee by breaching the duties of good faith and fidelity. Further, Mr Rajakaruna breached clauses 5.2 and 5.3 of the 2015 contract, which conduct is also said to constitute serious misconduct, and a failure to avoid conflicts of interest, and a breach of s 182(1), s 183(1) and s 184(2) of the Corporations Act 2001 (Cth). These breaches are said to have occurred by Mr Rajakaruna providing professional and accounting services for profit and reward without the knowledge and consent of ASPL.
(b)During the course of his employment with ASPL and following termination of his employment, Mr Rajakaruna breached his equitable duties of confidence and clause 21.2 of the 2015 contract by using confidential information in relation to each of the 18 client entities (listed in [47] of the statement of claim) for his own use and benefit by obtaining the customer relationship which otherwise existed between ASPL and the 18 client entities.
(c)By the same conduct referred to in (b) has interfered with the relationship of ASPL and the client entities in breach of cl 26.1 of the 2015 contract.
(d)By the same conduct referred to in (b) has breached s 183 (1) of the Corporations Act.
In support of its case, ASPL relies upon Ms Cohen's evidence, which is largely circumstantial; the evidence of Mr Rajakaruna; and the other affidavits filed on his behalf of former clients of ASPL, which is said to be evidence of the nature of 'confess and avoid'.[42]
[42] ts 16, 19 July 2019.
Relevant principles – the grant of an interlocutory injunction
The principles in relation to interlocutory injunctions were set out by Beech J in Twinside Pty Ltd v Venetian Nominees Pty Ltd. They are whether:[43]
(a)there is a serious question to be tried or a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be entitled to relief;
(b)the plaintiff will suffer irreparable injury for which damages will not be an adequate compensation unless an injunction is granted; and
(c)the balance of convenience favours the granting of an injunction.
[43] Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110 [7]; applying Castlemaine Tooheys Ltd v The State of South Australia [1986] HCA 58; (1986) 161 CLR 148, 153 (Mason ACJ).
In Castlemaine Tooheys Ltd v South Australia, Mason ACJ pointed out that the degree of likelihood of success is a factor related to the balance of convenience and that it might be that a probability, or even a distinct probability of success, might be needed to be shown if the injunction might adversely affect the public interest.[44] The two questions are not independent of each other and an apparently strong claim may lead a court more readily to grant an injunction where the balance of convenience is fairly even, or a claim of less strength (which nevertheless raises a serious question to be tried) may attract interlocutory relief where there is a marked balance of convenience in favour of it.
[44] Castlemaine Tooheys Ltd v South Australia [1986] HCA 58; (1986) 161 CLR 148, 154.
In Twinside Pty Ltd v Venetian Nominees Pty Ltd, Beech J explained this point as follows:[45]
As the apparent strength of the applicant's case diminishes, the balance of convenience moves against the making of an order: Glenwood Management Group Pty Ltd v Mayo [1991] 2 VR 49, 54 ‑ 55; Todd v Novotny [2001] WASC 171. The grant of an injunction involves balancing the injustice which might be suffered by the defendant if the injunction is granted and the plaintiff later fails at trial, against the injustice which might be suffered by the plaintiff if the injunction is not granted and the plaintiff later succeeds at trial: Films Rover International Ltd v Cannon Film Sales Ltd [1987] 1 WLR 670; Madaffari v Labenai Nominees Pty Ltd [2002] WASC 67 [14].
[45] Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110 [11].
The issues to be determined in the application for interlocutory relief
The question on an application for an interlocutory injunction is whether the applicant has made out a prima facie case for final relief that requires and justifies protection by interlocutory injunction.[46]
[46] Brimstone Resources Ltd v Empire Resources Ltd [2018] WASCA 107 [54] (Mitchell & Beech JJA).
In this matter, the question is whether ASPL has made out a prima facie case on the evidence presently before the court that there is a probability that it would be entitled to relief.
In determining this question the issues to be determined are as follows:
(a)what is the scope and effect of clause 5.2 and 5.3, clause 21 and clause 26.1; and
(b)on the facts before the court is there an arguable case that:
(i)any contractual provisions have been breached by Mr Rajakaruna;
(ii)the equitable duties of confidence, fidelity and good faith, including the duty to avoid conflicts of interest, have been breached by Mr Rajakaruna; and
(iii)s 182(1), s 183(1) and s 184(2) of the Corporations Act have been breached by Mr Rajakaruna.
Sections 182(1), s 183(1) and s 184(2) of the Corporations Act provide:
182Use of position—civil obligations
Use of position—directors, other officers and employees
(1)A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a)gain an advantage for themselves or someone else; or
(b)cause detriment to the corporation.
…
183Use of information—civil obligations
Use of information—directors, other officers and employees
(1)A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:
(a)gain an advantage for themselves or someone else; or
(b)cause detriment to the corporation.
…
184Good faith, use of position and use of information—criminal offences
Good faith—directors and other officers
…
(2)A director, other officer or employee of a corporation commits an offence if they use their position dishonestly:
(a)with the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the corporation; or
(b)recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation.
Restraint of trade clauses and equitable and common law principles of confidentiality
The liberty to contract has its limits. One limitation is the effect of contractual provisions to restrain trade. Ultimately, a balance must be struck between the liberty to contract and the liberty to trade.[47]
[47] Emeco International Pty Ltd v O'Shea [No 2] [2012] WASC 348; (2012) 225 IR 423 [2] (Edelman J).
The interpretation of restraint of trade clauses starts from the principle that a restraint of trade is contrary to public policy and void, unless it is justified by the special circumstances of the particular case. A restraint of trade covenant must be reasonable in reference to the parties concern and reasonable in reference to the interests of the public so framed, and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.[48]
[48] Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535, 565 (Lord Macnaughten); Smith v Nomad Modular Building Pty Ltd [2007] WASCA 169 [6] (McLure JA; Buss JA agreeing); Emeco International Pty Ltd v O'Shea [No 2] [2012] WASC 348 [66] (Edelman J).
A more rigorous approach is applied to restraints in contracts of employment than to contracts of the sale of goodwill (of business) and commercial agreements.[49]
[49] Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535, 566 (Lord Macnaughten); Peters American Delicacy Co Ltd v Patricias Chocolates and Candies Pty Ltd [1947] HCA 62; (1947) 77 CLR 574, 590.
The validity of the restraint must be decided as at the date of the contract.[50]
[50] Smith v Nomad Modular Building Pty Ltd [2007] WASCA 169 [7] (McLure JA; Buss JA agreeing); Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288, 318 (Walsh J).
In considering whether a restraint clause is reasonable, there are two aspects of the public interest. In Willhart Ltd v Samimi, Hasluck J explained:[51]
The central dilemma in this area of the law was aptly expressed by Gleeson CJ in Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 334. His Honour noted that there was a tension between two competing considerations of public policy. An employer is not entitled to protect himself against mere competition by a former employee. The corollary is that the employee is entitled to use skill, experience and know‑how acquired in the service of the former employer in legitimate competition. It is in the public interest that this should be so. At the same time, the law will protect trade secrets and confidential information, and will intervene to prevent their misuse.
[51] Willhart Ltd v Samimi [2000] WASC 239 [99].
Whilst an employer is not entitled to be protected against mere competition, an employer with legitimate interests is entitled to restrain an employee from taking competing employment for a set time that is reasonable as to the time and geographical extent.
ASPL argues that its case falls squarely within the principle first espoused by Lord Denning in Littlewoods Organisation Ltd v Harris.[52] In Littlewoods, Lord Denning observed:
It is thus established that an employer can stipulate for protection against having his confidential information passed on to a rival in trade. But experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not: and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if limited to a short period. That appears from the judgment of Cross J in Printers & Finishers Ltd v Holloway [1965] 1 WLR 1, 6:
'Although the law will not enforce a covenant directed against competition by an ex employee it will enforce a covenant reasonably necessary to protect trade secrets … If the managing director is right in thinking that there are features in the plaintiffs' process which can fairly be regarded as trade secrets and which their employees will inevitably carry away with them in their heads, then the proper way for the plaintiffs to protect themselves would be by exacting covenants from their employees restricting their field of activity after they have left their employment, not by asking the court to extend the general equitable doctrine to prevent breaking confidence beyond all reasonable bounds.'
[52] Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026; [1977] 1 WLR 1472.
In assessing reasonableness it is relevant to consider that, in respect of clause 26 – non‑solicitation, Mr Rajakaruna expressly acknowledged pursuant to clause 26.3 that the restraints in clause 26 were reasonable and intended that the restraints to operate to the maximum extent possible.
In Emeco Edelman J observed:[53]
It is also established that a restraint may be justified as protecting more than one legitimate interest. As Meagher JA (Campbell & Young JJA agreeing) explained in Jardin and Jardim Investments Pty Ltd v Metcash Ltd of a restraint in dealing with customers with whom an employee has a close relationship and in circumstances in which the employee has confidential information: 'a restraint on dealing with those customers could be justified as reasonably necessary to protect both interests'.
[53] Emeco International Pty Ltd v O'Shea [No 2] [2012] WASC 348 [70].
As to the question whether clause 21.2 and clause 21.3 are enforceable post‑termination of Mr Rajakaruna's employment, counsel for ASPL put an argument that clause 21.2 is not a provision in restraint of trade and as such does not fall to be considered under that doctrine.
The established authorities do not support ASPL on this point.
It is established that an express provision not to use confidential information after termination of employment is not regarded as an unreasonable restraint of trade provided that the court is satisfied that the information is objectively confidential and the restraint is no greater than is necessary to protect the employer's legitimate interest in protecting the information.[54]
[54] Lindner v Murdock's Garage [1950] HCA 48; (1950) 83 CLR 628, 640 – 641; Faccenda Chicken Ltd v Fowler [1987] CH 117, 137 – 138; Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317.
Courts recognise that over time confidential information can become progressively stale and recollection diminishes or becomes irrelevant.[55]
[55] Seven Network (Operations) Ltd v Warburton [No 2] [2011] NSWSC 386; (2011) 206 IR 450 [80] (Pembroke J).
It is generally accepted that there are three categories of confidential information. These are:[56]
(1)information of a trivial nature or which is so easily accessible from public sources that it cannot be regarded as confidential;
(2)information which may have originally been confidential because of its character or because the employee was told it was confidential, but which has become part of the employee's skill and knowledge; and
(3)trade secrets so confidential that even though they may have been learned by heart, and even though the employee has ceased employment, can only be used for the employers benefit.
[56] Faccenda Chicken Ltd v Fowler [1984] ICR 589; I Neil SC and N Saady The Reasonableness of Restraint: An Analysis of the Enforcement of Post‑Employment Restraints (2018) 46 ABLR 99, 103.
The first category of information will not be protected by the equitable or implied common law duties of confidentiality nor by a restraint of trade covenant. Information falling within the third category is protected by the equitable or implied common law duties of confidentiality. The second category of information is more problematic.
The second category comprises information that is confidential only as a consequence of an employee's obligation to develop and improve the employers business. Once the employment ends, that obligation ceases and the employee is free to use information in the second category.[57]
[57] I Neil SC and D Chin The Modern Contract of Employment (2017, 2nd ed) [8.91].
It is open however for an employer to protect the second category of confidential information by an express restraint of trade clause.
Clauses 5.2 and 5.3 of the 2015 contract
The obligations created in cl 5.2 and cl 5.3 are expressed to apply (and ASPL only claims a breach of) during the period which Mr Rajakaruna was employed.
Clause 5.2 is a restraint on paid and unpaid employment whilst employed by ASPL. However, cl 5.2 is not a restraint of other employment that is without qualification. The restraint is expressed to apply if three pre‑conditions are met. These are:
(a)the employer has not given written permission to engage in the other work;
(b)the other work is work that might adversely affect:
(i)the performance of the employee's duties; or
(ii)their obligations to the employer.
In Emeco, Edelman J considered the construction of a restraint of trade clause that prohibited an employee, post‑employment, from engaging in (among other activities) competitive work and solicitation of business or clients of Emeco without the prior written consent of Emeco.
It was accepted in Emeco that the words 'without the prior written consent of Emeco' included an implication that prior written consent would not be unreasonably withheld.
Edelman J had regard to a line of English authority and found that Emeco, in deciding whether to grant consent, must act reasonably by having regard to its legitimate interests and conformity with the purposes of the contract.[58] His Honour also found that a restraint of trade clause requiring an employer's consent could not operate to make enforceable a wide restraint clause which otherwise extended considerably further than the protection of the employer's legitimate interests.
[58] Emeco International Pty Ltd v O'Shea [No 2] [2012] WASC 348 [72].
Whilst the restraint of trade clause considered by Edelman J was a post‑employment constraint, when regard is had to the express terms of cl 5.2 it is strongly arguable that the same principles should be applied.
The evidence establishes that Mr Rajakaruna was given consent in writing by Mr Femia to obtain a tax agent licence. Further, that Mr Femia was at that time one of two directors and a joint shareholder of ASPL.
Mr Femia also gave consent to Mr Rajakaruna to prepare tax returns for his family and friends at home. It is contended on behalf of ASPL that Mr Femia was not authorised to provide permission to Mr Rajakaruna to either obtain a tax agent's licence or to prepare tax returns for his family and friends at home as Mr Femia was only one of two directors of ASPL.
Whilst Mr Femia's consent to prepare tax returns for family and friends was not in writing it is strongly arguable on the facts before the court that, at the time consent was given, written consent would not or should not have been withheld by ASPL as the evidence of Mr Rajakaruna and Mr Femia would establish (if accepted at its highest) that this work was not work that was in competition to ASPL, and Mr Rajakaruna agreed that if any business client's came to him he would refer them to ASPL.
Mr Femia says that, in fact, this occurred after he gave permission to Mr Rajakaruna to carry out this work.
The evidence of Mr Rajakaruna reveals that after he became registered as an individual tax agent he earnt a gross amount of $29,000 from 2016 until his employment came to an end with ASPL, with a loss (after expenses) of $691.09 in 2016, $9,103.60 in 2017 and $1,733.60 in 2018.[59]
[59] Affidavit of Priyanjith Suranga Rajakaruna, sworn 17 July 2019 [20], annexure RR‑2, pages 14 – 24.
Further, it appears clear from the names on SNR's client list (which comprised 52 individuals and three family trusts) and the profit and loss statements for SNR Accounting trust for the year ended 2018 (if accepted at its highest), that the work carried out by Mr Rajakaruna was not work for medium to large corporations or businesses. This is because it is open to infer from Mr Rajakaruna's evidence that he charged a maximum fee of $100 for each tax return that he prepared, and from the number of family and friends (clients) that he had, that such work was not carried out for a business of this nature.
As to cl 5.3 of the 2015 contract, on the evidence before the court (if accepted at its highest), there is evidence that Mr Rajakaruna did declare to a principal of ASPL (Mr Femia) his interest in his business of preparation of tax returns for family and friends. Consequently, no issue could arise as to whether such work could potentially be in conflict or in competition with the business of ASPL.
Clause 21.2 and 21.3 – Confidentiality
Clause 21.2 is expressly stated to apply to both during employment and after termination, and applies to any information which is confidential to the employer and/or business of clients, customers and suppliers which may have come to an employee's knowledge during course of employment.
Clause 21.3 provides a list of information which is said to be confidential but is not a list which is intended to be anything other than illustrative.
Whilst the submission was made on behalf ASPL that Mr Rajakaruna breached cl 21.2 whilst employed by it, I do not accept that there is any evidence before the court that could support this contention.
Apart from the width of cl 21.2 when read with cl 21.3, unlike cl 26 cl 21.2 is not limited in time and insofar as it applies to post‑termination employment it is strongly arguable that it is invalid (and unenforceable) on this ground.
Courts are unable to rewrite or reconstruct restrictive covenants. However, the offending parts of such clauses can be severed to ensure they operate reasonably for employers and employees. At common law this is referred to as severance by running a 'blue pencil' through the offending parts of a contractual clause.
In SST Consulting Services Pty Ltd v Rieson, their Honours Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ relevantly observed:[60]
The 'blue pencil' test was imported into the treatment of covenants in restraint of trade even though in that field, at least following the general adoption of the approach of courts of equity to such restraints, the emphasis has been upon questions of substance and of public policy.
The modern law respecting severance in relation to covenants in unreasonable restraint of trade may be seen as turning on three questions. The first question is whether the covenantee can enforce the restraining covenant to the extent to which it would have been valid had it been narrowly drafted. The answer is that the covenantee can do so if the parts which are too wide can be removed without altering the nature of the contract and without having to add to, or modify, the wording in any way other than by excision. The second question is whether the covenantor can enforce the promise in consideration of which the restraining covenant was given. The answer is that the covenantor can enforce the promise if the main consideration provided for it is not illegal. The third question is whether, if a contract is unenforceable because it contains a covenant in restraint of trade, transactions connected or associated with it are also unenforceable. The answer is that the unenforceability of the contract may affect the enforceability of other transactions with which it is closely connected.
[60] SST Consulting Services Pty Ltd v Rieson [2006] HCA 31; (2006) 225 CLR 516 [45] – [46].
In this matter, it appears not to be possible to sever any part of cl 21.6 to impose a time limit on the period of time which a confidentiality clause is to apply post‑termination of employment. To do so would be to rewrite the clause. The confidentiality clause could however be capable of severance so as to simply delete the words 'or after termination' so that it only applied whilst the contract of employment remained on foot.
Even if cl 21.2 is capable of enforcement post‑employment, or a duty of confidence could be implied which can, in some circumstances, survive termination of the employment contract for a limited period of time, such an obligation will only be implied to protect a legitimate interest of the employer.
The legitimate interest of an ex‑employer must necessarily be informed by the professional standards and principles that apply to the records that are regarded as records owned by ASPL and records that are owned by clients of ASPL.
In the CPA Australia 'Client Relationship Guide, issues to consider for new, existing and departing clients in Australia' (annexed to Ms Cohens affidavit as annexure JAC20) under the heading 'Retention and Ownership of Documents (including liens over records)' a table of documents is set out and includes categories of documents which are said to be documents that would usually be regarded as being owned by the client and the accountant. It appears from the table that the following documents are to be regarded as owned by the client:[61]
(a)books prepared for accounting purposes;
(b)profit and loss accounts;
(c)balance sheets etc reports that an accountant prepares;
(d)where an accountant prepares and submits the ATO accounts, tax returns and other relevant computations;
(e)the original letters of tax advice and documents prepared for the client for purpose of giving advice;
(f)client communications with a third party; and
(g)client's documents.
[61] Affidavit Julie Anne Cohen, sworn 8 July 2019, annexure JAC20, pages 177 – 181.
The table records that documents which are regarded as usually owned by the accountant are:
(a)any document prepared by the member and related to the audit (Mr Rajakaruna is not an auditor);
(b)drafts and office copies of final accounts of profit and loss, balance sheets etc;
(c)draft and office copies of final reports, memoranda and notes requested by the client;
(d)depreciation schedules;
(e)copies of income tax returns, financial statements of worksheets which originate in an accountants office;
(f)drafts, tax advice, papers and correspondence;
(g)letters written by the client to the accountant, letters written by the accountant to the client; and
(h)notes of questions and answers during client consultations.
The interest that ASPL seeks to protect, and has a legitimate interest in protecting, is the goodwill which is purchased that had been developed with its clients as a result of its employees performing accounting services. This interest is essentially the protection of customer or trade connections and is a legitimate interest of an employer capable of contractual protection.
In respect to the interest of an employer in contractually protecting goodwill, in Birdanco Nominees Pty Ltd v Money, Robson AJA observed: [62]
The trade connection created in accounting firms is well established. Clients of accounting firms tend to have a continuing relationship with employees of the firm. Those employees understand their clients' book-keeping procedures and affairs. These are qualities that are attractive to clients and encourage their continued custom of the firm. The knowledge and understanding of the clients’ affairs is created by the employees of the firm that are providing the accounting services to the clients. I am using the term 'employees of the firm' to encompass those principals or employees who provide accounting services to the clients.
If an employee of the firm leaves the firm that employee will carry with him the attachment he created in providing accountancy services to the firm’s clients. Depending on the degree of contact between the employee of the firm and the client, the client will have built up a degree of confidence that the employee has knowledge and understanding of its affairs and accounting requirements. The knowledge and understanding of the employee of the firm, and the corresponding confidence that the client has in that employee of the firm, form an important part of the goodwill of the firm.
[62] Birdanco Nominees Pty Ltd v Money [2012] VSCA 64; (2012) 36 VR 341 [42] – [43] (Maxwell P & Radlich JA agreeing).
Acting appeal Justice Robson also went on to observe:[63]
Justice Heydon says that it is not enough for the employee simply to have contact with the customers. He says that '[t]here must be some element in the employee-customer relationship which causes customers to rely on the employee and to regard the employee as the business to the exclusion of the employer'. Justice Heydon refers to an American authority where the trial judge pointed out that 'lift attendants, receptionists and apartment caretakers have very frequent and regular contact with their employer's customers, often resulting in most friendly relations; yet the customers do not follow those employees when they leave and it would be wrong to validate covenants restraining these employees from working for competitors on the ground of customer contact alone'. Justice Heydon emphasised the importance of the judge’s conclusion that '[t]he important thing is that the personal relation between the employee and the customer be such as to enable the employee to control the customer’s business as a personal asset'.
The importance of a personal attachment constituting a valuable asset is a significant aspect of the interpretation of the impugned restraint clause discussed later.
[63] Birdanco Nominees Pty Ltd v Money [2012] VSCA 64; (2012) 36 VR 341 [46] – [47].
In Birdanco, the employee in question, Mr Money, was subject to an express non‑compete clause from providing any services to any person who (as a client of the company) was provided with any of the services by him at any time during the three years prior to him ceasing to be employed by the company or for a specified time period alternatively a 12 month time period for a total period of three years. Mr Money was also subject to an express confidentiality clause which was substantially in the terms provided for in clause 22.1. However, the restraint that was sought to be enforced in that case, and that was enforced by the court, was not the confidentiality clause but the provision which prohibited Mr Money from providing, for a period of three years, services to any client who had been a client of Birdanco Nominees Pty Ltd and for whom he had provided accounting services during the three years before his employment ceased.
As to the details and particular requirements of former clients of ASPL that have become clients of Mr Rajakaruna, it appears from Ms Cohen's affidavit evidence that ASPL have relinquished some information of this kind to their former clients who in turn may or may not have provided that information to Mr Rajakaruna.
It is, however, likely that given the close connection that Mr Rajakaruna had to a number of former clients of ASPL that have now become his clients that he has retained some details of their businesses and perhaps business information of other former clients of ASPL in his memory. Such information will usually be absolutely protected by a restraint clause that is valid and enforceable. However, most of this information would become obsolete fairly quickly as different considerations apply in each tax year and retention of information that went to actual calculations may be information that is more difficult to recall with accuracy.
There is no evidence before the court that Mr Rajakaruna has disclosed the names of ASPL's clients to any person. Nor is there any evidence presently before the court that Mr Rajakaruna has in his possession or may have retained in his memory the contents of any documents that CPA Australia would regard as documents owned by an accountancy practice.
In light of my finding that it is strongly arguable that clause 21.2 is void and unenforceable insofar as it applies post‑termination of employment, I am not satisfied that ASPL has made out a prima facie case that Mr Rajakaruna has breached cl 21.2.
Nor am I satisfied, on the evidence before the court, that Mr Rajakaruna has breached an implied duty of confidence or has used information within the meaning of s 183(1) of the Corporations Act.
Clause 26.1(b) – can this clause be construed as a non‑compete covenant?
ASPL does not plead a breach of clause 26.1(a) which expressly prohibits Mr Rajakaruna (without the written consent of ASPL), following termination of employment, from directly or indirectly, soliciting, canvassing or approaching any person who was, at any time or during the 12 months preceding the termination of his employment, a client of ASPL.
On the evidence presently before the court it appears that such a claim may be problematic.[64]
[64] Planet Fitness Pty Ltd v Brooke Dunlop [2012] NSWSC 1435 (White J); Integrated Group Ltd v Dillon [2009] VSC 361 [60].
It is, however, important to reflect upon the constraints of a non‑solicitation clause as it reveals that a covenant against accepting business is usually ineffective in prohibiting customers from following an ex‑employee to a new business.
In Koops Martin Financial Services Pty Ltd v Reeves; it was a term of Mr Reeves contract of employment as a financial planner that he was to be restrained from approaching or enticing or endeavouring to entice away from a company any person, firm or company which was at any time during the 12 months before the termination of his employment, a client of the Koops Martin Group.[65] It was also a term that Mr Reeves was not to accept any instructions to perform any financial planning or advisory work for any person who is or was a client of the company in the 12 month period before such termination.
[65] Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449.
In Koops Martin Financial Services, Brereton J set out the following principles:[66]
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.
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.
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 Ltd v Skilton, and in Scorer v Seymour-Jones [1966] 1 WLR 1419 at 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.
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 Ltd v Olsen (sic) Littlewoods Organisation Ltd v Harris [1977] 1 AllER 1472 at 1479 and 1485; Wright v Gasweld Pty Ltd Kone Elevators Pty Ltd v McNay (1997) ATPR 41 ‑ 564, 44, 834].
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.
[66] Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449 [80] – [84].
In Koops Martin Financial Services v Reeves, a 'no dealing' restraint was found to be a reasonable protection of the employer's interest in its customer connections.
In this matter, ASPL pleads a breach of clause 26.1(b). It says that the effect of clause 26.1(b), which is to prohibit Mr Rajakaruna (for the period specified) of interfering with the relationship between ASPL and its clients, is a prohibition that must be given effect as a non‑compete clause.
Whilst restraint clauses are to be given to business‑like, common sense construction in which words are to be read fairly and broadly and not pedantically, I am of the opinion that to construe clause 26.1(b) as a non‑compete clause strains the meaning of the words used in this covenant.
A non‑competition clause is a covenant that expressly prohibits an ex‑employee from accepting any instructions to provide work, or undertake any work, for any person who has been a client of the employer, or engage in any dealings with former clients, for a specified period, or without consent of the former employer. The covenant in clause 26.1(b) is not a covenant of this nature.
To 'interfere' with a person's relationship with their clients contemplates an act of either procuring or enticing in some way a client to breach a contractual relationship with the former employer. There must be some act by the ex‑employee that has the effect of interfering with the contractual rights between an employer and its clients.
In this matter, the evidence before the court, when taken at its highest, is that:
(a)all of the 15 entities who were former clients of ASPL, and who have ceased to be clients of ASPL post‑termination of Mr Rajakaruna's employment, ceased to be clients by their own action; and
(b)there is no evidence that Mr Rajakaruna induced, enticed or otherwise encouraged any client of ASPL to cease to be a client of ASPL.
In any event, ASPL pleads a breach of clause 26.1(a) as interfering with the relationship of ASPL and its clients by using confidential information for his own use 'and' benefit. For the reasons I have already given I am not satisfied that ASPL has made out a prima facie case that Mr Rajakaruna has used any confidential information of ASPL for his own benefit.
Section 182(1), s 183(1) and s 184(2) of the Corporations Act
For these reasons, on the evidence presently before the court, I am not satisfied that ASPL has made out a prima facie case of a breach of s 182(1), s 183(1) and s 184(2) of the Corporations Act.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
EH
Research Associate/Orderly to the Honourable Justice Smith26 JULY 2019
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