Birdanco Nominees Pty Ltd v Money
[2012] VSCA 64
•4 April 2012
SUPREME COURT OF VICTORIA
COURT OF APPEAL
| BIRDANCO NOMINEES PTY LTD (ACN 009 321 377) | S APCI 2010 0149 |
| Appellant | |
| v | |
| LIAM PAUL MONEY | Respondent |
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| JUDGES | MAXWELL P, REDLICH JA and ROBSON AJA |
| WHERE HELD | MELBOURNE |
| DATE OF HEARING | 12 September 2011 |
| DATE OF JUDGMENT | 4 April 2012 |
| MEDIUM NEUTRAL CITATION | [2012] VSCA 64 |
| JUDGMENT APPEALED FROM | [2010] VCC 1495 (Judge Anderson) |
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CONTRACT – Restraint of trade – Penalty – Contract of employment between appellant firm and respondent trainee accountant – Restraint clause prohibiting employee from providing accounting services post-employment to clients of firm to whom he had provided services while employed there – Liquidated damages payable in event of breach – Amount of damages based on firm’s earnings from former client – Respondent left firm and provided services to former client of firm – Whether restraint clause breached – Whether restraint clause unreasonable restraint of trade – Whether liquidated damages clause imposed penalty – Clause enforceable – Damages recoverable – Appeal allowed.
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APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr M G Rinaldi | Russell Kennedy |
| For the Respondent | Mr D V Aghion | Sackville Wilks |
MAXWELL P:
I have had the advantage of reading in draft the reasons for judgment of Robson AJA. I, too, would allow the appeal and make orders in the terms which his Honour proposes. Subject to what follows, I would do so for the reasons which his Honour gives.
Restraint clauses of the kind in issue here have a long pedigree. It is well established that those who carry on a business of providing professional services are entitled to impose restraints on their employees, directed at protecting the goodwill of the business following the departure of an employee. In 1921, in Fitch v Dewes,[1] the House of Lords upheld a provision in the contract between a solicitor and his former articled clerk (subsequently, managing clerk), which restrained the clerk from carrying on the profession of solicitor in the same district.
[1][1921] 2 AC 158.
Sixty years later, in Sharah v Healey,[2] McLelland J relied on Fitch v Dewes[3] in upholding a like restraint contained in the partnership agreement of a firm of solicitors. His Honour said that there were
innumerable cases in which a covenant or agreement restraining a solicitor from acting as such in a particular area or for particular clients has been enforced.
McLelland J quoted the statement by Sir George Jessel MR in May v O’Neill[4] that
there is nothing against the public interest in a clerk’s agreeing not to take away the clients from his master.
[2][1982] 2 NSWLR 223.
[3][1921] 2 AC 158.
[4](1875) 44 LJ Ch 660, 661.
His Honour then set out the following extracts from the speeches in Fitch v Dewes,[5] which helpfully elucidate the basis on which such restraints are justified: Lord Birkenhead LC said:
Indeed I am of opinion that it is in the public interest that a proper restrictive agreement of this kind between an established solicitor, possibly an elderly man, and a younger man should be allowed. It is in the public interest, because otherwise solicitors carrying on their business without a partner would be extremely chary of admitting competent young men to their offices and to the confidential knowledge to be derived by frequenting those offices.[6]
Viscount Cave said:
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's business might be impaired and perhaps destroyed.[7]
And Lord Parmoor said:
It is no more than adequate protection for a solicitor who desires to protect his professional secrets and to protect his clients from being enticed away by a former clerk who has had access to all his papers and has been in direct personal relation with a number of his clients.[8]
[5][1921] 2 AC 158.
[6]Ibid 165.
[7]Ibid 168–9.
[8]Ibid 169–70.
The restraint clause in the present case is, of its kind, relatively narrow. It does not prevent Mr Money from going into practice as an accountant, nor does the limitation on his provision of accounting services extend to the entire client base of Bird Cameron.[9] Instead, the restraint is limited to the provision of services to those particular clients of Bird Cameron with whom Mr Money in the course of his employment with Bird Cameron – and by virtue of the opportunity which that employment offered him – established a continuing relationship. That is precisely the kind of connection which, the authorities make clear, the employer is entitled – within reasonable limits – to protect.
[9]Cf Bearingpoint Australia Pty Ld v Hillard (2008) 60 AILR 250–017.
As Robson AJA has noted, Mr Money argued on appeal that the restraint clause applied only where services had been provided to a client of Bird Cameron by a professional chartered accountant or taxation agent. Otherwise, it was said, every employee of Bird Cameron ‘right down to the receptionists’ would be exposed to an argument that they had provided relevant ‘services’ to a Bird Cameron client during their period of employment with Bird Cameron, placing them at risk of a future breach of the clause.
This submission must be rejected. The manifest intent of the restraint clause is to prevent an employee – in the period after he/she leaves Bird Cameron – from exploiting a relationship established with a Bird Cameron client during that period of employment in order to re-establish that client relationship in a different employment capacity. Plainly enough, the possibility of exploitation of the pre-existing relationship will only arise where the provision of services during the period of employment with Bird Cameron was such as to establish what was referred to in argument as a ‘client connection’. It is equally plain that no secretary or receptionist would ever be regarded as having established a ‘client connection’ in that sense.
On the other hand, it is not only partners or principals in a firm who have the opportunity, or the need, to establish a client connection in the course of the provision of services. Of course, before such a connection was likely to be established, there would need to have been some continuity or recurrence in the provision of services. But there is an obvious need for such continuing or recurrent relationships to exist between clients and employees, as well as partners, of the firm. This is so because the time of partners is, necessarily, limited and because it would be prohibitively expensive for all of the work on a client’s accounting and tax affairs to be done by a partner.
The duration of such a restraint is usually an important factor in determining whether the restraint is reasonable. The assessment of duration will depend, in particular, on the nature of the employer’s interest which is being protected and on
‘the field in which [the restraint] was designed to operate’.[10] When the clause in question is (as here) directed at preventing the solicitation of clients, it is relevant to consider the risk of such solicitation occurring.[11]
[10]Stenhouse Australia Ltd v Phillips [1974] AC 391, 402E.
[11]Ibid 401.
The risk which arises in circumstances such as these is a significant one, in my view. The risk arises precisely because the Bird Cameron employee has the opportunity – and the obligation – to develop a personal relationship with the Bird Cameron client, and to acquire knowledge and understanding of the client’s affairs. Those are the very things which are likely to make it attractive to the client to leave Bird Cameron when the employee leaves, in order to be able to maintain that relationship and take advantage of that accumulated knowledge and understanding. When those considerations are brought to bear, it seems to me that the three year restraint is perfectly reasonable.
REDLICH JA:
I agree for the reasons of Robson AJA and those additional reasons of Maxwell P, that the appeal should be allowed and the orders made which Robson AJA proposes.
ROBSON AJA:
Introduction
Bird Cameron (the appellant) is a major firm of chartered accountants. Mr Liam Paul Money (the respondent) is a former employee of the firm. Whilst employed by Bird Cameron, Mr Money entered into a restraint of trade agreement with Bird Cameron limiting his ability to provide accounting services, after he had ceased employment with Bird Cameron, to clients of Bird Cameron that he had provided services to whilst employed by Bird Cameron.
After Mr Money ceased his employment with Bird Cameron, he commenced part time employment with a major client of Bird Cameron, the Szencorp Group, and part time employment with another firm of accountants, Benjamin King Money. He thereafter provided accounting services to the Szencorp Group and other former clients of Bird Cameron that he had provided accounting services to whilst employed by Bird Cameron.
Bird Cameron took proceedings against Mr Money in the County Court for damages for breach of the restraint of trade agreement. Bird Cameron’s claim was dismissed. Bird Cameron appeals to this Court.
Three main questions arise on the appeal. The first is whether the restraint clause was enlivened by the actions of Mr Money in providing accounting services to clients of Bird Cameron after he ceased employment with Bird Cameron. This question turns on whether during his employment he provided ‘the Services’ to that client within the meaning of the restraint clause. The learned trial judge found that he did. Mr Money by a notice of contention contends that the trial judge erred in so finding.
If the trial judge was correct in finding that Mr Money did provide ‘the Services’ within the meaning of the restraint clause, the second question is whether his Honour wrongly found that the restraint clause was unreasonable and therefore unenforceable.
If his Honour erred in his finding that the restraint clause was unenforceable, the third question is whether his Honour erred in finding that the clause in the agreement providing for the calculation of liquidated damages (the damages clause) in the event of a breach of the restraint clause is a penalty and therefore unenforceable.
For the reasons that follow, I find that the trial judge did not err in finding that the restraint clause was enlivened by the actions of Mr Money in providing accounting services after ceasing his employment with Bird Cameron. On the other hand, I find that the trial judge erred in finding that the restraint clause was unenforceable as an unreasonable restraint of trade. I also find that the trial judge erred in finding that the liquidated damages clause was a penalty.
In my opinion, the orders of the County Court should be set aside and in lieu thereof Mr Money should be ordered to pay Bird Cameron $188,495.65 plus interest accrued and the costs of the appeal and the proceeding.
The relevant facts
After leaving school, Mr Money started an accounting course at university. He withdrew from the course after a few months. Late in 2002, when aged 19, he was offered a job with Bird Cameron, Chartered Accountants, by Mr Cameron Watson. Mr Watson had formerly been a partner with Mr Money’s father, Mr Paul Money in the firm Benjamin King Money. Mr Money commenced his employment as a trainee accountant in January 2003.
Mr Money signed a written contract of employment with Bird Cameron. The full terms of the contract are set out below. The contract sought to protect the goodwill interests of Bird Cameron. The contract contained a restraint of trade clause which governed the employee’s conduct for a period of three years after the cessation of employment. The contract made it a breach by the employee, if he were to later provide defined accounting services to a person who had been a client of Bird Cameron, and for whom Mr Money had provided accounting services during the three years before his employment ceased. In the event of such a breach of the employment contract, it was provided that the employee must pay as liquidated damages ‘a sum equal of 75% of the fees incurred by the client … in the last full financial year in which the client’ had remained a client of Bird Cameron.
Mr Money started work on 13 January 2003. Mr Watson was his manager and immediate supervisor. Mr Money was employed by Bird Cameron for over six years. In that time, he was promoted to the position of supervising accountant although he did not complete the study required to obtain formal accounting qualifications. Mr Money completed his studies after he left Bird Cameron and is now a qualified accountant. Mr Money’s responsibilities at Bird Cameron included the preparation of income tax worksheets and other preparatory material for the Szencorp Group of companies, a substantial client of Bird Cameron.
After more than six years with Bird Cameron, Mr Money performed his work as a supervising accountant dealing directly with clients. His work was only subject to review and ‘signing off’ by the principal accountant of his section, Ms Demenna. While carrying out his duties at Bird Cameron, Mr Money had established a close relationship of client and accountant with the financial controller of the Szencorp Group, Ms Sophie Davis, and the relationship was of a ‘continuing and recurring kind.’[12]
[12]To use the words of Wickham J in Taylor v CP Bird & Associates, Full Court of the Supreme Court of Western Australia, unreported, 9 November 1978, discussed below.
On 19 April 2009, Mr Money tendered his resignation to Bird Cameron in order to take up part time employment, three days a week, with the Szencorp Group. Mr Money left Bird Cameron on 24 June 2009. He also commenced employment with the firm of accountants, Benjamin King Money, working two days a week. He started with the Szencorp Group on 13 July 2009.
In August 2009, the Szencorp Group sought a quotation from Bird Cameron for the continued performance of accounting services for the following twelve months. In September 2009, a similar quotation was requested from Benjamin King Money. Bird Cameron’s quotation dated 17 September 2009 totalled $144,760. Benjamin King Money’s quotation dated 21 September 2009 totalled $71,500. The Szencorp Group terminated its retainer with Bird Cameron and engaged Benjamin King Money to perform the necessary accounting services for the financial year 2009/2010.
The trial judge found that in respect of the Szencorp Group (and certain other clients), Mr Money had performed accounting work for those clients during the period of 12 months prior to him ceasing his employment with Bird Cameron and had performed accounting services for those clients on behalf of Benjamin King Money, during the period of 12 months after he ceased his employment with Bird Cameron.
In the proceeding below, based on the actions of Mr Money, Bird Cameron claimed a sum equivalent to 75 per cent of the fees of the Szencorp Group (and certain other smaller clients) for the year to 30 June 2009, they being the clients which Mr Money continued to do work for at Benjamin King Money following the termination of his employment with Bird Cameron.
There was no dispute between the parties that Bird Cameron’s loss calculated in accordance with the liquidated damages clause was the sum of $188,495.65. This sum was calculated essentially as 75 per cent of the fees incurred in respect of the Szencorp Group, and the other relevant smaller clients, for the financial year ended 30 June 2009. Mr Money conceded that 75 cents in the dollar was a reasonable pre-estimate of the price to acquire a parcel of fees of clients in an accounting practice.
The employment agreement
The agreement signed by Mr Money was as follows:
TO:Birdanco Nominees Pty Ltd as trustee for the Birdanco Practice Trust of 8 St George’s Terrace, Perth, Western Australia (“the Company”, which term includes its successors and assigns.)
WHEREAS the Company carries on the practice of Chartered Accountants, taxation agents, business advisor and activities of a related nature (“the Services”) in Western Australia and elsewhere in Australia under the name of Bird Cameron and otherwise.
NOW in consideration of the Company employing or continuing to employ me I the undersigned COVENANT AND AGREE as follows:
1.During the continuance of my employment to serve the Company faithfully and well and use my best endeavours to promote the interest and goodwill of the Company; not to engage in any other profession, trade or business without the Company’s written consent; and not to induce, solicit or entice any existing client of the Company, or any person (which term shall in this agreement where the context so admits include a public body company or association or body of persons corporate or incorporate) proposing to be a client of the Company, to engage any person other than the Company to provide any of such Services.
2.Not at any time, either during or after termination of my employment with the Company, to make use of or provide to any other person any information obtained by me during my employment with the Company as to the name, nature of business, or accounting, taxation or business advisory requirements of any person who was a client of the Company during my employment by the Company, save at the request of that person, or as required by law or for the purpose of my employment with the Company.
3.Not at any time, either during or after termination of my employment with the Company, to reveal to any person any secret or confidential operations, processes or dealings, or any other information, whether computerised or manual, concerning the organisation, business, finances, transactions, or affairs of the Company or its clients; and to keep with complete secrecy all confidential information entrusted to me; and not to use or attempt to use any such information in any manner likely to injure or cause loss either directly or indirectly to the Company or its business or goodwill.
4.
(a)Not on my own account, or for any other person, for a period of 3 years’ after ceasing employment with the Company, to solicit or canvass
(i)any person who as a client of the Company was provided with any of the Services by me at any time during the 3 years prior to my ceasing to be employed by the Company, and who was a client of the Company at the time of my ceasing employment with the Company; or
(ii)any person who as a client of the Company was provided with any of the Services by me at any time during the 4 years prior to my ceasing to be employed by the Company, and who was a client of the Company at a time 12 months or less prior to my ceasing employment with the Company to engage me or any other person to provide any of such Services.
(b)Each of the covenants in paragraphs (a) (i) and (ii) of this clause is a separate, independent and severable covenant.
(c)The negative covenants in paragraph (a) shall not apply to soliciting any of such Services for any person where the Company has agreed that it is unable or unwilling to provide those Services to that person.
(d)Should I breach either of the two covenants in paragraph (a) of this clause, or the covenants in clauses 1 or 2, I agree to pay to the Company as liquidated damages, a sum equal to 75% of the fees incurred by the particular client with the Company for Services rendered in the financial year immediately preceding the breach of such covenant (if, as a result of such breach the Company loses work of that client) without prejudice to the right of the Company’s right to claim, in the alternative, such damage as it may establish that it has suffered through loss of the business of the particular client. For the purposes of this clause “fees
incurred” means the total amount chargeable to the particular client inclusive of Goods and Services tax.
5.
(a)Not on my own account, or for any other person, for a period of 3 years after ceasing employment with the Company, to provide any of the Services to either
(i)any person who as a client of the Company was provided with any of the Services by me at any time during the 3 years prior to my ceasing to be employed by the Company, and who was a client of the Company at the time of my ceasing employment with the Company; or
(ii)any person who as a client of the Company was provided with any of the Services by me at any time during the 4 years immediately prior to my ceasing to be employed by the Company and who was a client of the Company, at a time 12 months or less prior to my ceasing employment with the Company.
(b)Each of the covenants in paragraphs (a) (i) and (a) (ii) of this clause is a separate, independent and severable covenant.
(c)The negative covenants in paragraph (a) shall not apply to providing any of such Services for any person where the Company is unable or unwilling to provide.
(d)Should I breach either of the covenants in paragraph (a) this clause, I agree to pay as liquidated damages a sum equal to 75% of the fees incurred by the client with the Company for Services rendered by the Company in the last full financial year in which the client remained a client of the Company, without prejudice to the right of the Company to claim in the alternative, such damage as it may establish that it has suffered through loss of the business of the particular client. For the purpose of this clause “fees incurred” means the total amount chargeable to the particular client inclusive of Goods and Services Tax.
6.The provisions in clauses 1, 2 and 3 shall be without prejudice to the Company’s right to claim damages at common law for breach of any of the covenants on my part contained in this agreement.
The Services
Mr Money contended that the meaning of ‘the Services’ in the employment agreement is that of services of professional practitioners, and not those provided by undergraduates, trainees, clerks or other unqualified persons. Mr Money submitted that he had not provided such a service as might be provided by a professional practitioner or as may give rise to a ‘relationship between client and accountant’ either during his employment with Bird Cameron or later when employed by Benjamin King Money or by Szencorp. As mentioned above, at that time Mr Money had attained the position of supervising accountant but had not yet completed his accountancy studies or been admitted to membership of one of the accounting professional bodies.
The trial judge held that the that the phrase ‘the Services’ was not limited to services provided by a chartered accountant, a tax agent or a business adviser. He held that ‘the Services’ would extend to the services provided by Mr Money in his first year at Bird Cameron as a trainee even if the work was of a limited although not trivial nature. The trial judge accordingly found that the restraint clause had been enlivened by the actions of Mr Money in providing services to a client of Bird Cameron after he had ceased employment with Bird Cameron.
The trial judge found, however, that the restraint clause went far beyond what was reasonable to provide adequate protection to Bird Cameron’s legitimate business interests and could not therefore be justified. He found that on his interpretation of ‘the Services’ a person in the position of Mr Money would be prevented from taking up employment with a prospective employer who may require him to provide services to a client for whom he had performed some work ‘of a limited although not trivial nature’ whilst at Bird Cameron years previously.
The trial judge also held that the liquidated damages clause constituted a penalty. His Honour was not satisfied that clause should be regarded as a genuine pre-estimate of Bird Cameron’s loss and damage. He found this followed from the wide circumstances in which the breach of the restraint clause might operate.
Mr Money’s notice of contention
By his notice of contention, Mr Money contends that the trial judge erred in finding that the services he provided to the Szencorp Group fell within the definition of ‘the Services’ in the agreement. Alternatively, if his conduct did fall within the definition of ‘the Services’ then Mr Money says that the trial judge did not err in finding that the agreement was an unreasonable restraint of trade.
Restraints of trade
It was not disputed that the impugned restraint clause amounts to a restraint of trade. The restraint clause does not absolutely prohibit Mr Money from performing work for clients or former clients of Bird Cameron after the termination of his employment with Bird Cameron. It does, however, impose the liability to pay damages to Bird Cameron if the clause is enlivened, that is, if Mr Money services any of Bird Cameron’s clients or former clients, that he had previously serviced, as provided for in the restraint clause.
The restraint clause, being in restraint of trade, is against public policy and prima facie void. It is enforceable only if Bird Cameron can demonstrate that the restraint is no more than is necessary for the protection of Bird Cameron’s legitimate interest on the best estimate of what the parties themselves make of the future.[13] That issue is to be determined as at the date of the making of the agreement.[14] In the context of a restraint of trade in an employment contract, the onus rests upon the employer to establish that the restraint is necessary to protect the employer’s legitimate interests.[15] A restraint clause in an employment agreement will be enforceable only if the restrictions imposed are reasonable having regard to the interests of the parties that are to be protected, as well as to the public interest.[16]
[13]Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 707 (Lord Parker of Waddington); Lindner v Murdock’s Garage (1950) 83 CLR 628, 631; and Amoco Australia Pty Ltd v Rocca Bros Engineering Co Pty Ltd (1972) 133 CLR 288, 315–316 (Gibbs J).
[14]Putsman v Taylor [1927] 1 KB 637, 643 (Salter J); Drake Personnel Ltd v Beddison [1979] VR 13, 25 (Anderson J).
[15]Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 707 (Lord Parker of Waddington); Lindner v Murdock’s Garage (1950) 83 CLR 628, 653 (Kitto J).
[16]Nordenfelt v Maxim Nordenfelt Guns & Ammunition [1894] AC 535, 565 (Lord Macnaughton); and Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 707 (Lord Parker of Waddington). See also Lindner v Murdock’s Garage (1950) 83 CLR 628, 633; and Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126.
Interpretation of the restraint clause
The principal rule of construction is that when a covenant or agreement is impeached on the ground that it contains an unreasonable restraint of trade, the duty of the Court is, first to interpret the covenant or agreement itself, and to ascertain according to ordinary rules of construction what is the fair meaning of the parties, and then to apply the rule as to reasonableness with reference to the extent of the impeached covenant, and to see whether it goes too far.[17] Like any other contractual clause, ‘a covenant in restraint of trade is in the first place to be construed in accordance with the natural and ordinary meaning of its words.’[18] The impeached clause should be construed with reference to the object sought to be obtained.[19]
[17]Mills v Dunham [1891] 1 Ch 576, 579 (Chitty J); J D Heydon, 136.
[18]McMahon v National Foods Milk Ltd (2009) 25 VR 251, 277 [54] (Nettle JA, with whom Neave and Dodds-Streeton JJA agreed).
[19]Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472, 1481 (Lord Denning MR); see also Courtenay Polymers Pty Ltd v Deang [2005] VSC 318, [99]‑[101] (Whelan J).
These principles of construction were confirmed by Dixon CJ in Butt v Long[20] where he said:[21]
An agreement in restraint of trade, like every other agreement, is to be construed with reference to its subject matter and descriptive words may be restricted in their operation by reference to the circumstances in which the parties contract. But the agreement should be interpreted for the purpose of ascertaining its real meaning independently of the rules prescribing the tests of reasonableness for the purpose of ascertaining its validity. If an evident ambiguity appears from its text it may be proper to take into account the law relating to the validity of covenants in restraint of trade in resolving the ambiguity, but a restrictive interpretation of general words is not to be adopted simply to save a covenant ... from invalidity.
[20](1953) 88 CLR 476.
[21](1953) 88 CLR 476, 487 (Dixon CJ).
A covenant in restraint of trade should be construed in a business fashion. In Southland Frozen Meat & Produce Export Co Ltd v Nelson Brothers Ltd,[22] a decision of the Privy Council, their Lordships said that the words of a covenant in restraint of trade should be given their business meaning and not their wider possible dictionary meaning. They said having regard to the agreement, that it must be construed in a business fashion and:[23]
[22][1898] AC 442.
[23]Ibid 444.
… that the words must not be applied to everything that might be said to come within a possible dictionary use of them, but must be interpreted in the way in which businessmen would interpret them, when used in relation to a business matter of this description.
Bird Cameron’s interest in protecting its goodwill
In the present case, the parties agreed, and the trial judge accepted, that Bird Cameron ‘had a legitimate interest in protecting the goodwill which developed with its clients as a result of its employees performing accounting services.’[24]
[24]Birdanco Nominees Pty Ltd v Money [2010] VCC 1495, [31].
The interest that Bird Cameron seeks to protect is, essentially, the customer or ‘trade’ connection Bird Cameron has with those of its clients who dealt directly with Mr Money. Such a ‘customer connection’ is a legitimate interest of the employer, capable of contractual protection. Latham CJ said in Lindner v Murdock's Garage[25] ‘[t]he interest which can validly be protected is the trade connection, the goodwill of the business of the employer.’
[25](1950) 83 CLR 628, 634.
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.
The entitlement to protect such an interest was recognised by Latham CJ in Lindner v Murdock's Garage where he said:[26]
Where an employee is in a position which brings him into close and personal contact with the customers of a business in such a way that he may 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 his business, a covenant preventing him from accepting employment in a position in which he would be able to use to his own advantage and to the disadvantage of his former employer the knowledge of 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. Reference has already been made to the right of an employer to protect his "trade connection" - a right recognised in cases in which covenants were held to be invalid because they went beyond what was reasonably necessary to protect such a connection.
[26]Ibid 636.
The Honourable Justice Heydon, writing on the issue in his textbook ‘The Restraint of Trade Doctrine’, says that if there is a recurring need for the employee’s services, a covenant may be appropriate.[27] He says that the employer is in greatest danger when the employee must work closely with the customer for a long time in conditions of some confidentiality, and where the employee’s services are the main part of the transaction. He says that the clearest example of this circumstance is perhaps accountancy, citing a Canadian judge who said:
The chartered accountant is also an expert and consultant in regard to income taxation and has come to occupy, vis-à-vis his client, a relation almost as confidential as that of a solicitor. Therefore, the personal element is a very important factor in this profession; the client having bared, if not his soul, at least his records, to an accountant, has established a confidential relationship which he will not lightly change, because, for one thing, a change involves making the same sort of revelations to another person new and strange to him.[28]
[27]J D Heydon, 126–127.
[28]Campbell Imrie and Shankland v Park [1954] 2 DLR 170, 174 (Wilson J); see also H&R Block Ltd v Sanott [1976] 1 NZLR 213, 218 (Somers J) concerning a covenant to protect the business of preparing tax returns.
Justice Heydon says that it is not enough for the employee simply to have contact with the customers. He says that ‘there 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.’[29] 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.’[30] Justice Heydon emphasised the importance of the judge’s conclusion that ‘the 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.’[31]
[29]J D Heydon, 121–122. See also Magna Alloys and Research Pty Ltd v Ten-Haaf [1978] Tas SR 136, 148.
[30]J D Heydon, 122 summarising Arthur Murray Dance Studios Inc v Witter (1951) 105 NE 2d 685, 706 (Hoover J) (Ohio CP).
[31]Arthur Murray Dance Studios Inc v Witter (1951) 105 NE 2d 685, 706 (Hoover J) (Ohio CP).
The importance of a personal attachment constituting a valuable asset is a significant aspect of the interpretation of the impugned restraint clause discussed later.
Mr Money’s submissions on the interpretation of ‘the Services’
With those principles in mind I turn to the submissions of Mr Money. He contends that at the heart of the appeal is the definition of ‘the Services’ in the impugned restraint clause. The definition of ‘the Services’ is given as ‘the practice of chartered accountants, taxation agents, business adviser and activities of a related nature’. Mr Money says that the definition of ‘the Services’ should be construed in the light of the interpretation given to ‘serviced’ by the Full Court of the Supreme Court of Western Australia in Taylor v C P Bird & Associates[32] (‘the Taylor case’) when considering a similar restraint clause. That clause was the forerunner of the clause in issue in this appeal.
[32]Unreported decision of the Supreme Court of Western Australia, Full Court, delivered 9 November 1978.
In that case, the Court heard an appeal from a defendant against a judgment of the District Court awarding C P Bird & Associates the sum of $4,977 as liquidated damages for breach of a restrictive covenant in an employment agreement. C P Bird & Associates was the predecessor of Bird Cameron. The appellant began working with C P Bird & Associates as a trainee accountant. Whilst at the firm, he qualified as an accountant. The firm alleged that since the appellant had ceased employment with the firm, he had been performing tax or accounting services for a number of persons each of whom was, during the course of the appellant’s employment by the respondent, serviced by the appellant as a client of the respondent.
Prior to leaving the firm, the appellant had signed an agreement which contained a restraint clause similar to that in the agreement with Mr Money. The agreement contained two undertakings in respect of liability. The first was not to solicit. The other undertaking was as follows:
Not at any time during or for a period of three years after the termination of my employment on any account or for any reason whatsoever … to perform any tax or accounting services for any person firm or company or other organisation … which at any time during the course of the said employment shall have been serviced by me as a client of your firm …
Wickham J construed the meaning of ‘serviced’ in the phrase ‘shall have been serviced by me as a client of your firm’ as follows:[33]
I think that the word ‘serviced’ here means the provision of recurring accountancy and tax consulting professional service and advice, being such as to establish a relationship of client and accountant between the client and the appellant, of a continuing or recurring kind rather than only of a casual nature, and being such as to create for the appellant an element of personal goodwill with an understanding of the client’s affairs. This interpretation seems to me to be the likely understanding of the matter between the parties having regard to the circumstances. The respondent may be taken to have sought to guard against the carrying away of part of its goodwill by an employee who had established a personal professional relationship with a client and was thereby in a position easily to do that.
[33]Ibid 5.
Similarly Smith J adopted Wickham J’s interpretation of the word ‘serviced’ and rejected an interpretation which would have given the restraint clause application to ‘people serviced by the appellant during the period of his employment with the respondent’, which Smith J said was an interpretation which could not be ‘supported as being reasonably necessary for the protection of the respondent’s legitimate interest.’[34]
[34]Page 2 of his judgment.
The trial judge declined to follow the interpretation adopted in the Taylor case. He found that the restraint could be enlivened by an employee who had merely performed work of a ‘limited although not trivial nature’ for a client of Bird Cameron.’ He did not accept that ‘the Services’ should be of a ‘continuing or recurring kind rather than only of a casual nature, and being such as to create for the [Bird Cameron] an element of personal goodwill with an understanding of the client’s affairs.’
Mr Money draws attention to two aspects of this construction of ‘serviced.’ First, he points to the provision of services of a continuing or recurring kind. He says a one-off provision of accounting work would not be caught by the clause. To that extent he may be seen as differing from the trial judge. He says that it is the recurrent nature of the service that triggers the restraint.
Secondly, Mr Money points to two elements in the construction of ‘serviced’: professionalism, and the relationship of ‘client and accountant.’ Mr Money says that these elements import a notion of a certain level of seniority within the Bird Cameron firm, such as a person who provides professional services and advice such as to establish a relationship of client and accountant.
Mr Money contends that the proper construction of the impugned clause in this case requires the implication of similar elements such that the impugned clause only applies to somebody who is capable of providing professional services as defined. Mr Money contends that, accordingly, the definition of services in the impugned restraint clause should be limited to the provision of recurring accountancy, tax consulting and special services such as to establish a relationship of client and accountant of a continuing and recurring kind. On this basis he argues that the impugned clause only applies to professional practitioners and not to undergraduates, trainees, clerks or other unqualified persons, such as he was.
Mr Money argues that the work he did is not caught by such a construction of ‘the Services’. He says that he was not a qualified accountant, chartered accountant or taxation agent. He says that he was not a business adviser in the sense of providing advice to a client without internal supervision and prior review.
Mr Money argues that the services he provided were of a different quality to the kind of professional services covered by the restraint clause. The services he provided, he said, were properly regarded as book-keeping services. Furthermore, to the extent that he assisted in the provision of ‘the Services’, they were being provided by the firm, Bird Cameron (or by his principal, Ms Demenna), and not by himself, personally.
Mr Money contends that under that interpretation of the impugned clause he did not provide ‘the Services’ to the Szencorp Group so as to enliven clause 5. Mr Money contends that his relationship with the Szencorp Group was not that of client and accountant. He says he was not a qualified accountant, being neither a CPA nor a Chartered Accountant, nor did he hold a tertiary accounting qualification.
Mr Money says that to the extent that the phrases ‘business adviser’ and ‘activities of a related nature’ mean anything different, they must take on the colour and quality of the phrases that precede them; that is, the professional positions of chartered accountant and taxation agent.
Mr Money says that this interpretation is corroborated by the formulation ‘… who as a client of the company was provided with any of the services by me …’ in clause 5(a)(i). Mr Money says the use of the personal pronoun dictates that it is Mr Money who must have provided the services as opposed to the firm of Bird Cameron in general. Mr Money argues that to reason otherwise would expose every employee of Bird Cameron, right down to the receptionist, to an argument that they have provided services post-employment and have therefore acted in breach of the restraint.
Mr Money submits that the appeal and notice of contention are the opposite sides of the same coin; either ‘the Services’ are read restrictively so as to apply to ‘engagement principals’ or ‘partners’, or persons of similar standing within Bird Cameron, (and thus not to him) or they are read broadly (as the trial judge did), in which case the clause is likely to be struck down as being unreasonably wide in its application to a junior employee such as Mr Money.
In response to this argument, Bird Cameron points out that Mr Money was a para-professional who performed recurring work for clients and who had regular and direct contact with them. It says that Mr Money developed a close working relationship with clients of Bird Cameron including Sophie Davies, the Financial Controller of the Szencorp Group. Bird Cameron accepts that the definition of the impugned clause should be interpreted as in the Taylor case, but argues that the definition encompasses the accountancy services provided by Mr Money to the Szencorp Group.
Did Mr Money provide the ‘Services’ to the Szencorp Group?
Bearing in mind the subject matter of the relevant clause, I consider that the construction of ‘serviced’ adopted in the Taylor case is also applicable to the proper construction of ‘the Services’ in the restraint clause in this case. Under that definition, the services provided by the employee of the firm must be likely to engender in the employee a reasonable level of knowledge of the affairs and accounting requirements of the client and a corresponding level of confidence by the client in the employee. Thus the services provided must go further than ad hoc or isolated services, and must involve the employee providing those services on a continuing or recurring basis such as to create with the client an element of professional goodwill.
In my view, the trial judge failed to properly take into account the object and purpose of the impugned clause, which was to protect the goodwill of Bird Cameron. The interpretation adopted in the Taylor case gives effect to the object and purpose of the impugned clause. I do not think the impugned clause is aimed at services provided in the course of conducting the accountancy practice that do not engender goodwill for the firm, as the trial judge’s interpretation would have it.
As mentioned above, Mr Money urged on the court that the Taylor case definition should be preferred on the basis that it involves ‘a relationship of client and accountant between the client and the [person providing the service].’ He argues that this limits the application of the provision to services provided by a qualified accountant.
Mr Money would have it that professional accounting services require the services of a qualified accountant. In my view, one does not need to be a qualified accountant to provide professional accounting services, under the supervision of a qualified accountant.
In my opinion, the provision of the professional accounting services by Mr Money under the supervision of a qualified accountant was such as to establish a relationship of client and accountant between Mr Money and the Szencorp Group even though he was not a qualified accountant. The proof of this fact is supported by the Szencorp Group immediately engaging Mr Money to provide ’the Services’ to the group after he left Bird Cameron.
In my opinion, the key element of the Taylor case definition of ‘serviced’ is the building of professional goodwill through the provision of recurring accounting services. The professional goodwill that is created between the client and the employee service provider is the property of Bird Cameron that the restraint clause is designed to protect.
In my opinion, the principle underlying the Taylor case is applicable to the interpretation of the impugned restraint clause applying to Mr Money. On this construction of the restraint clause, the work of Mr Money may not have been caught by the clause when he commenced employment at Bird Cameron. The clause, however, is only enlivened when the employee ceases employment. It seems to me that the parties intended that Mr Money would be trained by Bird Cameron in providing accounting services so that, as his career progressed, he would eventually be able to provide to clients of Bird Cameron professional accounting services under the supervision of qualified accountants.
I reject Mr Money’s contention that the trial judge erred in his finding that Mr Money was not providing ‘the Services’ within the meaning of the restraint clause. I find, like the trial judge, that Mr Money was providing ‘the Services’ to the Szencorp Group whilst employed by Bird Cameron within the meaning of the restraint clause, although I differ on the reasons why I have arrived at that conclusion.
Was the restraint clause an unreasonable restraint of trade?
The trial judge found that Bird Cameron had not established that the clause was not an unreasonable restraint of trade. Bird Cameron contends that the trial judge erred in so holding.
In my view, the covenant has three aspects to it that should be taken into account in considering whether it is unreasonable. First is the nature of the restraint. Second is the imposition imposed on the covenantor. Third is the duration of the restraint.
Nature of the restraint
The restraint clause must be considered in context of the agreement as a whole. Under clause 1, Mr Money agreed during his employment to serve Bird Cameron faithfully and not to solicit or entice any existing client of Bird Cameron to engage any other person other than Bird Cameron to provide any of ‘the Services’. Under clause 2, Mr Money agreed not to at any time, either during or after the termination of his employment with Bird Cameron, make use of or provide to any other person information obtained during his employment about the accounting affairs of a client save at the request of that person. Under clause 3, Mr Money agreed not to, either during or after termination of his employment, reveal information of the affairs of Bird Cameron or its clients and not to use any such information in any manner likely to injure or cause loss to Bird Cameron or its business or goodwill. Under clause 4, Mr Money agreed not to solicit or canvass any clients of Bird Cameron that he had provided ‘the Services’ to during the three years prior to his ceasing employment.
Clause 5 was directed to a situation where Mr Money provided ‘the Services’ to a person he had also provided ‘the Services’ to when he was employed by Bird Cameron. The restraint did not apply where Bird Cameron was unable or unwilling to provide ‘the Services.’ The impugned clause did not prevent Mr Money from competing with his former employer. Mr Money was able to establish an accounting practice next door to Bird Cameron if he chose. Mr Money was not restrained from acting for any person that retained him. The practical effect of clause 5 being enlivened was that, when approached by a former client of Bird Cameron that he had provided the defined services to, Mr Money was not prevented from providing those services. Rather, he could provide those services subject to being liable to pay the liquidated damages sum or damages Bird Cameron suffered through the loss of the business of the particular client.
In context, the covenant placed little restraint on Mr Money, while providing reasonable protection to Bird Cameron’s goodwill. Bird Cameron had introduced the client to Mr Money. Bird Cameron had provided the facilities and supervision to enable Mr Money to build up goodwill in that client. The goodwill belonged to Bird Cameron, not to Mr Money.
Imposition on the convenantor
The second aspect of the restraint is the quantum of the damages. The damages were the payment of a sum equal to 75 per cent of the fees incurred by the client with Bird Cameron for ‘the Services’ rendered by Bird Cameron in the last full financial year in which the client remained a client of Bird Cameron, without prejudice to the right of Bird Cameron to claim in the alternative such damage as it may establish that it has suffered through the loss of the business of the particular client.
During the trial, Mr Money conceded that 75 cents in the dollar was a reasonable pre-estimate of the price to acquire a parcel of fees of clients in an accounting practice. On the appeal, Mr Money contends that the principal problem is applying the assessment to a trainee as part of an employment agreement, as if it were ‘an enforced client purchase agreement.’ Mr Money says that the liquidated
damages clause is thus unconscionable or extravagant in its application to a person such as himself before he achieved the status of a qualified accountant.
As it is, in my opinion the fee would only become payable if Mr Money provided ‘the Services’ as construed above. In my opinion, the payment of reasonable damages for breaching an otherwise valid restraint should not make the restraint unreasonable. I defer consideration of this issue to the consideration of whether or not the liquidated damages were a penalty or not. There was no objection to the restraint on the ground that the alternative measure of damages suffered by Bird Cameron was unreasonable.
The time restraint
The restraint applies for three years after the termination of Mr Money’s employment with Bird Cameron. The clause is enlivened if Mr Money provides ‘the Services’ to a former client of Bird Cameron within three years of leaving, and if Mr Money provided ‘the Services’ to that client in the three year period before he ceased employment with Bird Cameron. Thus, as the trial judge explained, the clause could be enlivened where Mr Money began providing ‘the Services’ to a client, after he left Bird Cameron, that he provided ‘the Services’ to up to six years previously.
In those circumstances, was the three year ‘restraint’ unreasonable? The Privy Council in Stenhouse Australia Ltd v Phillips[35] put the test as follows:[36]
The question is not how long the employee could be expected to enjoy, by virtue of his employment, a competitive edge over others seeking the clients’ business. It is rather, what is a reasonable time during which the employer is entitled to protection against solicitation of clients with whom the employee had contact and influence during employment and who were not bound to the employer by contract or by stability of association. This question, secondly, their Lordships do not consider can advantageously form the subject of direct evidence. It is for the judge, after informing himself as fully as he can of the facts and circumstances relating to the employer’s business, the nature of the employer’s interest to be protected, and the likely effect on this of solicitation, to decide whether the contractual period is reasonable or not. An opinion as to the reasonableness of elements of it, particularly of the
time during which it is to run, can seldom be precise, and can only be formed on a broad and common sense view.
[35][1974] AC 391.
[36]Ibid 402.
Justice Heydon suggests a test that has particular relevance in this case: ‘how soon the hold of the old employee over customers will weaken, what is the time that would have to elapse before a branch manager who has quit the territory would no longer be able to return and acquire his business’?[37]
[37]J D Heydon, 169; Fullerton Lumber co v Torborg (1955) 70 NW 2d 585, 591 (Martin J) (SC Wisconsin).
In my view it is probable that Mr Money would still retain some material level of attachment necessarily formed with a client by providing ‘the Services’ after an almost six year break in providing those services. Mr Money would have a degree of knowledge of the client’s affairs that would avoid the client having to explain and disclose its financial structure and history, something that it would have to disclose if it retained somebody unaware of its circumstances. Part of the attraction to the client of retaining Mr Money would be the attachment that was formed when he was employed by Bird Cameron in providing ‘the Services’ to the client.
In my opinion, three years is a reasonable time during which Bird Cameron was entitled to protection against Mr Money exploiting the goodwill he created for the benefit of Bird Cameron when providing ‘the Services’ to clients of Bird Cameron.
Applying the strictures of the Privy Council in Stenhouse Australia Ltd v Phillips, in my opinion the duration of the impugned restraint did not make it unreasonable.
The liquidated damages clause
The final issue is whether the liquidated damages are a penalty. A liquidated damages clause is recognised at law as a useful and practical means of determining the consequences of a breach of contract, makes good commercial sense, and avoids the difficulties of proof and the trouble of litigation.[38]
[38]Robophone Facilities Ltd v Blank [1966] 1 WLR 1428, 1447 (Diplock LJ).
A sum fixed by a contract is a penalty only if it is ‘extravagant and unconscionable’ in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. Further it is not enough that it should be lacking in proportion. It must be ‘out of all proportion’. The question of whether a sum was a penalty ‘is a question of construction to be judged upon the terms and inherent circumstances of each particular contract, judged as at the time of the making of the contract’. The party sued on the clause bears the onus of proving that the clause is a penalty.[39]
[39]Robophone Facilities Ltd v Blank [1966] 1 WLR 1428, 1447 (Diplock LJ); Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504, 527.
The principles governing the identification, proof and consequences of penalties in contractual situations was formulated in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd[40] where Lord Dunedin said:
[40]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, 86-88 (Lord Dunedin); approved by the High Court of Australia in Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656, 662 [10] (Gleeson CJ, Gummow, Kirby, Hayne, Callinan and Heydon JJ).
1. Though the parties to a contract who use the words ‘penalty’ or ‘liquidated damages’ may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be passim in nearly every case.
2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage ...
3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged as at the time of the making of the contract, not as at the time of the breach ...
4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:
(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach...
(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid ...
(c) There is a presumption (but no more) that it is penalty when 'a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage’ …
On the other hand:
(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make a precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties.[41]
[41](citations omitted).
The trial judge concluded that the liquidated damages were not a genuine pre-estimate of the damages suffered by Bird Cameron in view of the wide range of circumstances the restraint clause could be enlivened.
When viewed, however, in the light of the narrower circumstances in which the restraint clause could be enlivened, I find that the liquidated damages were a genuine pre-estimate of the damages likely to be suffered by Bird Cameron. The trial judge accepted the evidence of the market value of the goodwill of Bird Cameron. That evidence was not challenged on appeal. Mr Money conceded that the sum of 75 cents in the dollar of fees was a reasonable pre-estimate of the price to acquire a parcel of fees of an accounting practice.
In my opinion, Mr Money did not establish that the liquidated damages were other than a genuine pre-estimate of damage. If Mr Money provided ‘the Services’ to the client after he ceased employment with Bird Cameron it was highly likely that Bird Cameron would have lost that client to Mr Money or Mr Money’s new employer and thus lost the goodwill reflected by that client’s custom. In my opinion, a reasonable pre-estimate of that loss was 75 per cent of the fees incurred by the client with Bird Cameron for the Services rendered by Bird Cameron in the last full financial year in which the client remained a client of Bird Cameron.
I find that the trial judge erred in his finding that the liquidated damages clause constituted a penalty.
Conclusion
The validity of the impugned restraint clause has to be assessed at the time the agreement was entered into. It seems to me that a fair measure of the damages looking forward was the valuation of the goodwill lost to Bird Cameron. The nature of the restraint, the extent to which it operated and the damages payable were such that, in my opinion, the restraint was no more than was reasonably required to protect the legitimate interest of Bird Cameron. For these reasons, in my opinion, the trial judge erred in finding that the impugned restraint clause was an unreasonable restraint of trade.
I have not referred individually to the grounds of appeal raised by Bird Cameron. The matters raised have all been dealt with either expressly or by implication.
For these reasons the appeal should be allowed. I propose that the following orders should be made. Appeal allowed and the orders below be set aside. In lieu thereof that there be judgment for the plaintiff in the sum of $188,495.65 plus interest accrued and that the respondent pay the costs of the appeal and the proceeding. The notice of contention must be dismissed.
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