CPB Financial Services Pty Ltd ACN 008 286 897 v Kalic
[2019] SADC 149
•11 October 2019
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
CPB FINANCIAL SERVICES PTY LTD ACN 008 286 897 v KALIC
[2019] SADC 149
Judgment of His Honour Auxiliary Judge Clayton
11 October 2019
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSIDERATION
CONTRACTS - RESTRAINT OF TRADE
CONTRACTS - EMPLOYMENT CONTRACT - NON COMPETITION AND NON SOLICITATION
Held:
1. Non competition and non solicitation clauses in Deed held to be in restraint of trade and void on the basis that the clauses restrained the employee from soliciting all clients of the employer, not just those clients whom the employee serviced.
2. Reducing formulae for calculating compensation depending on invalidity are void for uncertainty because the employee cannot know what the operative obligation is.
CPB Financial Services Pty Ltd v Kalic [2019] SADC 80, 24 June 2019; The Restraint of Trade, 3rd edition JD Heyden, 52; Queensland Co-operative Milling Association v Pamag Pty Limited (1973) 133 CLR 260; Herbert Morris Ltd v Saxelby [1916] 1 AC 688; Davies v Davies [1887] 36 Ch D 359; Lindner v Murdoch's Garage (1950) HCA 48; I.F. Asia Pacific Pty Ltd v Simon Galbally and Others [2003] VSC 192; Koops Martin Financial Services Pty Ltd v Dean Reeves [2006] NSWSC 449; Coote v Sproule (1929) 29 SR (NSW) 578; Ibid [61]; Stenhouse Australia Ltd v Philips [1974] AC 391; Gilford Motor Company v Horn [1982] 2 NSWLR 223; [1933] 1 Ch 235; Sharah v Healey and Bridge v Deacons [1984] 1 AC 705; Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449 [63], [55], [70],91]; Burton and Eising v Wright Trading Pty Ltd [2007] QSC 17; Emeco International Pty Ltd v O'Shea [2] WASC 348 [209]; Commsupport Pty Ltd v Mirow [2018] QDC 134; Ibid [67], [68]; AGA Assistance Australia Pty Ltd v Tokody [2012] QSC 176; Ibid [17]; Commsupport Pty Ltd v Mirow [2018] QDC 134 [88]; Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co-Ltd [1894] AC 535; Ibid [565], considered.
CPB FINANCIAL SERVICES PTY LTD ACN 008 286 897 v KALIC
[2019] SADC 149
Mr Kalic was employed by the plaintiff in its business as a financial planner between 2003 and January 2016. In May 2004, he executed an Employment Confidentiality and Non-competition Deed (‘the Deed’) which is the subject of these proceedings. In its Statement of Claim the plaintiff sought judgement in the sum of $498,470 by applying a 500% factor pursuant to clause 4.7.4 of the Deed or alternatively damages, an account of profits or equitable compensation.
The way in which the plaintiff has presented its case has confined the claim to compensation for deemed solicitation pursuant to Clause 4.7 of the Deed. During the hearing, the plaintiff reduced the amount of its claim to $201,612.32, being a 200% factor pursuant to clause 4.7.8 of the Deed. Mr Williams, counsel for the plaintiff, submitted that if $201,612 32 was not the appropriate amount, because clause 4.7.8 was invalid, then the judgment should be for $100,906.12, being a 100% factor pursuant to clause 4.7.9. The reduction in the amount of the claim implies an acknowledgement that the factor of 500% and subclauses 4.7.4 to 4.7.7 inclusive were invalid, presumably as a penalty. The plaintiff alleges that more than 80 of its clients terminated their engagement and retained Mr Kalic or his new employer to provide financial planning advice. That allegation has been proved by the evidence.
In his defence Mr Kalic alleges that the employment contract is invalid or unenforceable and that he did not owe fiduciary duties to the plaintiff.[1] He also alleges that the Deed is invalid or of no effect because it purports to impose obligations which are unlawful restraints of trade and which are invalid and unenforceable[2] and that the definition of “client” in clause 4.8 includes persons whom he does know and has had no dealing or contact with and that the restraint is accordingly invalid and unenforceable.[3]
[1] Defence at 4, 5.
[2] Defence at 25 (e), 28(a), 28(d).
[3] Defence at 28(e).
I have already answered certain questions relating to the interpretation of the Deed following a preliminary hearing.[4] I rejected allegations that Mr Kalic signed the Deed under duress or the undue influence of the plaintiff’s agents and that the Deed was not properly witnessed. I found that Mr Kalic had the opportunity to obtain legal advice if he so desired and that he was aware of the general nature of the Deed, that is to protect the plaintiff if a financial advisor left. I accepted that the actions of Mr Kalic in executing the Deed were the independent well understood acts of a person exercising free judgement.
[4] CPB Financial Services Pty Ltd v Kalic [2019] SADC 80, 24 June 2019.
The events leading to the termination of the employment of Mr Kalic by the plaintiff commenced on 4 January 2016 when Mr Kalic wrote to the board of the plaintiff.[5] In that letter Mr Kalic gave notice of his intention and stated that he wished to come to an agreement which would have permitted him to contact those clients that he currently provided advice to. He acknowledged that CPB would like to be compensated and said that he was open to discussions. He wrote:
In the unfortunate event that we are unable to come to an agreement and I’m forced to leave CPB, from an ethical standpoint I will still make a $500 payment for each client that decides to contact me of their own volition (terms and conditions will apply).
[5] Exhibit “REA 9” to the 2nd affidavit of Roger Ellis Atkins.
The parties were unable to come to an agreement and the employment of Mr Kalic was terminated by the plaintiff on 5 weeks’ notice from 20 January 2016 by a letter dated 19 January 2016.
On 7 March 2016 Mr Kalic commenced practice as an employee of Payneham Financial Services Pty Ltd.[6] The evidence establishes that some clients of the plaintiff whom had been serviced by Mr Kalic whilst employed by the plaintiff transferred their business to the new employers of Mr Kalic.
[6] Defence at 23, 24.
In cross-examination at the first hearing Mr Kalic acknowledged that he asked for permission to contact clients because he understood that the data belonged to the plaintiff and he understood that he needed to pay compensation to the plaintiff.[7] In re-examination Mr Kalic said that it was always his intention to negotiate and pay a fair price for the clients but the environment became hostile and the plaintiff terminated his employment.[8] When the relationship between the parties broke down the negotiations over compensation stalled.
[7] T [53.2].
[8] T [57. 27-34].
The prime focus of the evidence during the current hearing was the calculation of the plaintiff’s entitlement to compensation for deemed solicitation pursuant to the terms of the Deed.
In his oral submissions, Mr Kalic has challenged the validity of provisions of the Deed on the basis that those provisions restrict his ability to solicit all clients of the plaintiff, not just those with whom he dealt. He pointed out that the plaintiff has provided no proof of solicitation but relies upon a deeming provision in clause 4.8 of the Deed. Mr Kalic submitted that the entire case turned upon the interpretation of the provisions of the Deed and submitted that the definition of “Client” in Clauses 4.7 and 4.8 was too wide.[9]
[9] T [278.14] – [279-24].
Mr Kalic submitted that clause 4.6 of the Deed did not apply because he was not an employee.[10] That submission is incorrect. It is not necessary for Mr Kalic to be employed for clause 4.6.2 to apply. Even after his employment was terminated he was “the Employee” for the purpose of clause 4.6 because he is the person described as such in Schedule 2 to the Deed.
[10] T [268.11].
The first question is whether the relevant provisions of the Deed are a covenant in restraint of trade. Mr Williams, counsel for the plaintiff, argued that the provisions in the Deed are not restraint provisions but are provisions which provide “You are entitled to do all these things but if you do then you need to pay us reasonable compensation for them”.[11]
[11] T [285] – [286]
Paragraphs 1, 2 and 3 of the Deed are concerned with confidential information. Those provisions can be ignored for present purposes.
Part 4 of the Deed is set out under the heading “Restraint and Solicitation”. Clause 4.2 Deals with “Non-Competition and Non-Solicitation During Employment”. That clause has no application in the present case.
Clause 4.3 deals with “Non-Competition and Non-Solicitation After Termination of Employment.” That clause provides that the Employee must not compete with the Employer, induce employees of the Employer to leave the employment, solicit persons who were at any time during the previous calendar year clients of the Employer to deal with the Employee or to accept business from such clients. The plaintiff does not rely upon clause 4.3.
The resolution of this case is governed by clauses 4.6, 4.7 and 4.8 of the Deed. Those clauses provide:
4.6 Permitted Solicitation of Clients after Termination of Employment
Notwithstanding the obligations set out in clause 4.3, solicitation of clients is permitted if the Employee complies with the terms of this Deed in relation to such solicitation. Should the Employee fail to comply with the requirements of this Deed in relation to permitted solicitation, the Employer may choose to:
4.6.1 Enforce the requirements of the non-solicitation clause; and/or
4.6.2 Enforce the provisions of this Deed in relation to the circumstances in which solicitation is permitted.
If during the Restraint Period after the termination of the employment of the Employee, the Employee induces or solicits clients of the Employer to deal with:
4.6.3 the Employee; or
4.6.4 any person, firm or corporation employing or associated with the Employee
the Employee must compensate the Employer for the value of the client portfolio lost to the Employer if the client so solicited or induced cease to deal with the Employer.
4.7 Requirements for Permitted Solicitation
The following provisions procedure by which solicitation or inducement is permitted to occur:
4.7.1 the Employee must first advise the Employer of the names of the clients of the Employer whom the Employee wishes to solicit for business;
4.7.2 the Employee and the Employer will then attempt to reach agreement on the value of the client portfolio to the Employer of the clients;
4.7.3 if agreement is reached, the Employee must pay the agreed sum to the Employer and solicitation can continue.
If the Employee and the Employer are unable to agree on the value to the Employer of the client portfolio of any particular client, or if the Employee does not follow the procedure set out in the preceding subclauses the formula used to calculate the value of the client portfolio shall be:
4.7.4 500% of the yearly average value of the work billed to the client over the preceding 3 calendar years prior to the termination of the Employee or 500% value of the work billed to the client over the preceding 12 months prior to the termination of the Employee whichever is the greater; or
4.7.5 if the amount of 500% is held by any court to be invalid, 400% to the client over the preceding 3 calendar years prior to the termination of the Employee or 400% of the value of the work billed to the client over the preceding prior to the termination of the Employee whichever is the greater; or
4.7.6 if the amount of 400% is held by any court to be invalid, 350% of the yearly average of the work billed to the client over the preceding 3 calendar years prior to the termination of the Employee or 350% of the value of the work billed to the client over the preceding to the termination of the Employee whichever is the greater; or
4.7.7 if the amount of 350% is held by any court to be invalid, 300% of the work billed to the client over the preceding 3 calendar years prior to the termination of the Employee or 300% of the value of the work billed to the client over the preceding 12 months prior to the termination of the Employee whichever is the greater; or
4.7.8 if the amount of 300% is held by any court to be invalid, 200% of the yearly average value of the work billed to the client over the preceding prior to the termination of the Employee or 200% of the value of the work billed to the client over the preceding 12 months prior to the termination of the Employee whichever is the greater; or
4.7.9 if the amount of 200% is held by any court to be invalid, 100% of the yearly average value of the work billed to the client over the preceding 3 calendar years prior to the termination of the Employee or 100% of the value of the work billed to the client over the preceding 12 months prior to the termination of the Employee whichever is the greater.
4.8 Solicitation Deemed to Have Occurred
Solicitation or inducement of a client by the Employee shall be deemed to have occurred, whether or not the Employee actually solicited or induced the client, if:
4.8.1 the Employer is advised by the client that the client will in future utilise the services of the Employee or persons of any person firm or corporation employing or associated with the Employee; or
4.8.2 the Employee is advised by the client that the client will in future utilise the services of the Employee or any person firm or corporation employing associated with the Employee; or
4.8.3 A client requests that work be performed for the client by the Employee or any person, firm or corporation employing or associated with the Employee.
For the purpose of this clause, client includes any client for whom the Employer (or any employee of the Employer) has provided services in the 3 years prior to the termination of the employment by the Employee with the Employer.
It is to be noted that clause 4.6 commences with the phrase “Notwithstanding the obligations set out in clause 4.3…” It therefore purports to permit the solicitation of clients by the Employee even if the Employee is prevented by clause 4.3 from soliciting them.
The second part of clause 4.6, after subclause 4.6.2, provides that if the Employee does induce or solicit clients of the Employer to deal with himself or his new employer, the Employee must compensate the Employer for the value of the client portfolio lost to the Employer if the clients who are solicited are induced cease to deal with the Employer. Because of clause 4.8 solicitation or inducement of a client by the Employee can be deemed to have occurred.
For the purpose of clauses 4.7 and 4.8 “client” is defined to include any client for whom the Employer has provided services in the 3 years prior to the termination of the employment of the Employee with the Employer. It is not confined to those clients serviced by Mr Kalic.
The plaintiff invokes the deeming provision in clause 4.8 to establish that solicitation occurred. The circumstances which have triggered the deeming provision are those described in subclauses 4.8.1 to 4.8.3. I find that the evidence establishes that the requirements for deemed solicitation have been met.
If the Employee solicits clients the unnumbered clause following clause 4.6.4 requires Mr Kalic to compensate the plaintiff for the value of the client portfolio lost.
The parties were not able to agree on the value of the client portfolio and Mr Kalic did not follow the procedure set out in subclauses 4.7.1, 4.7.2 and 4.7.3, so that the value of the client portfolio that he is required to pay as compensation is to be calculated by the formulae in clauses 4.7.4 to 4.7.9.
Clause 4.7 contains cascading provisions which reduce the amount to be paid by the Employee for the value of the client portfolio depending upon the invalidity of earlier subclauses. Such clauses are sometimes described as “ladder” clauses or “step” clauses.
Mr Williams argued that the Deed is not a restraint of trade but provides that if solicitation does occur compensation must be paid.
Whether the Deed amounts to a restraint is to be answered by considering the practical working of the alleged restraint rather than merely its legal form. Heyden[12] states:
The most recent answer given is Diplock LJ ‘s in Petrofina (Great Britain) Ltd v Martin, which was approved by Lord Hodson in Esso Petroleum Co-v Harpers Garage (Stourport) Ltd. Diplock LJ said:
A contract in restraint of trade is one in which a party (the covenantor) agrees with any other party (the covenantee) to restrict his liberty in the future to carry on trade with other persons not parties to the contract in such manner as he chooses
In the same case Lord Denning MR said:
[E]very member of the community is entitled to carry on any trade or business he chooses and in such manner as he thinks most desirable in his own interests, so long as he does nothing unlawful; with the consequence that any contract which interferes with the free exercise of his trade or business, by restricting him in the work he may do for others, or the arrangements which he may make with others, is a contract in restraint of trade.”[13]
[12] The Restraint of Trade, 3rd edition JD Heyden, 52
[13] JT Heyden, The Restraint of Trade Doctrine 3rd edition the 52
The practical working effect of the Deed is to restrict the liberty of Mr Kalic to trade with clients of the plaintiff unless he follows the procedure set out in the Deed and pays the value of the client portfolio to the plaintiff. I find that clauses 4.6, 4.7, and 4.8 of the Deed restrict the work Mr Kalic may do for others and are in restraint of trade.
Whether the restraint of trade provisions in the Deed are enforceable depends upon whether the restraint is reasonable in the interests of both contracting parties and the public: Queensland Co-operative Milling Association v Pamag Pty Limited;[14] Herbert Morris Ltd v Saxelby.[15] In assessing the reasonableness of the provision it is necessary to consider the width of the restraint and the compensation that will be payable by Mr Kalic if solicitation does occur.
[14] (1973) 133 CLR 260.
[15] [1916] 1 AC 688.
Clause 7 provides that if any subclause is invalid then the value of the client portfolio is to be calculated by reference to the formula set out in the next step in the ladder. Whether any subclause is invalid cannot in this case be determined by the provisions of the Deed but is left to the court to decide. A similar but not identical provision was discussed in Davies v Davies[16] where Cotton LJ said at 387 that:
Construing it in that way… It is a covenant which the court in my opinion ought not to enforce. If the parties wish to ask the court to assist them in restraining those with whom they are dealing from breaking a limited covenant against carrying on a trade they must, in my opinion, themselves fix the limits within which there is to be no carrying on of the trade, and then they do it at their peril. The law will determine whether that limit is a good one, or whether it is one which is so unreasonable that the covenant must fail. It is entirely different from the covenant to settle property in a certain line or family “so long as the rules of law and equity will allow”… There is no definite fixed rule as to the limits within which trade can be restrained. That must depend upon the circumstances of each case; and in my opinion it is wrong to make a covenant in this form, and wrong for the court to enforce it, because one sees at once what difficulties will arise if an injunction is granted… Are we again and again to have this question to arise on the covenant, where the parties have left the covenant entirely indefinite and have sought to get the court, without risking the validity of the covenant, from time to time, to say whether a particular space and a particular time is within the limits. In my opinion if one looks at it in that, which is the modified form, the answer to it is this; there are no limits fixed by law which can be regarded as introduced into this covenant. A covenant in this form, indefinite as it is in my opinion, is one which neither a court of equity nor a court of law or to enforce. The parties must make up their minds to say what they agree to as regards limits of time or space within which there is to be no trading.
[16] [1887] 36 Ch D 359.
The fundamental problem with the cascading provisions in subclauses 4.7.4 to 4.7.9 is that an Employee who wishes to solicit the clients of the employer or who is deemed to have solicited clients can never know the value of the client portfolio payable by way of compensation pursuant to clause 4.6 until such time as the validity of the steps in subclauses 4.7.4 to 4.7.9 has been determined by a court. For that reason, I find that the provisions of clauses 4.6 at 4.7 are unreasonable, uncertain and void.
The plaintiff relies on subclause 4.7.8 or if that is invalid 4.7.9. The Deed does not tell the Employee what amount he is required to pay.
Prima facie, a clause in restraint of trade is void and unenforceable. The person seeking to enforce the provision has the onus of demonstrating that it was reasonable for the purpose of protecting the business of that person.
In Lindner v Murdoch’s Garage[17] Kitto J stated:
“Any contractual restraint of trade is prima facie unlawful and invalid.” It is not that such restraints must of themselves necessarily operate to the public injury, but that it is against the policy of the common law to enforce them except in cases where there are special circumstances to justify them. The onus of proving such special circumstances must, of course, rest on the party alleging them. When once they are proved, is a question of law for the decision of the judge whether they do or do not justify the restraint. There is no question of onus one way or another.” Herbert Morris Ltd v Saxelby [1916] AC 688 at 706, 707 per Lord Parker of Waddington; Routh v Jones [1947] 1 All ER 758, at 763 per Lord Greene M.R. (at 653).
5. The validity of the restraint must be decided as at the date of the agreement imposing it. “The question is not whether experience gained during the service has shown the restriction to have been excessive or insufficient. The question is whether the covenant was a reasonable one for the parties to agree to at the outset of the service on the best estimate which they could then make of the future”: Putsman v Taylor (1927) 1KB 637, at 643. (FN – 83 CLR at 653)
Kitto J said:
7. In these circumstances it is necessary to consider what it was for which, and what it was against which, the respondent’s needed protection: Herbert Morris v Saxelby (1916) 1 AC, at P708. The answer is that they needed protection for their business connection against the possibility of its being affected by the personal knowledge of and influence over the customers which the appellant might acquire in their employment (1916) 1 AC, at p 709… To adapt the words of Lord Birkenhead in Fitch v Dewes (1921) 2 AC 158, at 164, the respondent’s might claim for their protection that that business which was theirs, and to which they were admitting the appellant in the manner defined in the agreement, should continue to be theirs, and that if at any time the contract of employment between themselves and the appellant should come to an end, on such determination the latter should not be in a position to use “the intimacies and the knowledge” which he had acquired in the course of his employment in order to create or assist a competing business in the same area and by so doing undermine the business connection of the respondent’s. The knowledge referred to does not include the technical knowledge and skill which the appellant might acquire In the employment (cases cited). The knowledge which, because its use may deprive the Employer of the business connection which he is entitled to preserve as his own, he may require his Employee to abstain from using, is objective knowledge of the customers, their peculiarities, their credit and so forth: (1916) 1 AC, at p 714; cf Routh v Jones (1947) 1 All ER, at P761. Against the prejudice likely to result from such “intimacies and knowledge” the respondents were entitled to protect their business by means of a contractual restraint of a width reasonable in reference to the interests of both parties (cases cited). But to be valid, such restraint “must afford no more than adequate protection to the party in whose favour it is imposed”: Herbert Morris Ltd v Saxelby (1916) 1 AC, at P707; Mason v Provident Clothing and Supply Co (1913) AC, at pp 733, 742. (At P654).
[17] (1950) HCA 48.
In I.F. Asia Pacific Pty Ltd v Simon Galbally and Others[18] Dodds-Streeton J considered a restraint clause which provided that the defendant should “not offer to perform services and otherwise solicit the custom of any person or corporation which any time during your company’s contract with I.F. was a client of I.F. or its related companies”. Her Honour said:
In determining whether a restraint clause goes further than is necessary in order to protect the legitimate interests of the Employer, and is therefore invalid, it is necessary to construe the meaning of the clause. It is necessary to consider the “factual matrix” in which the parties contracted. It is established that the correct approach is to construe the meaning of the restraint clauses by reference to the documentary context and surrounding circumstances. If there is ambiguity, a reading down of the literal terms of the covenant may be justified. It is also necessary to consider whether the clause, as construed, goes further than the minimum required to protect the legitimate interests of the Employer, as established by evidence of the interest to be protected. Latham J in Lindner v Murdoch’s Garage stated that the court must-“ascertain with due particularity the nature of the masters business and of the servants employment therein.
[18] [2003] VSC 192.
In Koops Martin Financial Services Pty Ltd v Dean Reeves[19] the defendant was employed by the plaintiff as a financial planner. The defendant’s contract of employment included a restraint by which he undertook that for a period of 12 months from the termination of his employment he would not accept any instructions to perform financial planning advisory work for any person who was a client of the plaintiff in the 12-month period before such termination. Mr Reeves left the plaintiff to work for a competing firm where he accepted instructions to perform financial planning and advisory work for persons who had been clients of the plaintiff during the period 12 months from his departure from the firm. Brereton J considered the reasonableness of a restraint which was not restricted to clients serviced by the defendant. Brereton J referred to Coote v Sproule[20] where Harvey CJ in Eq said that this type of covenant should logically be confined to a restraint on soliciting or serving any customer the employee had served on the employer’s behalf who, but for such solicitation or service, would have continued or renewed his trade with the employer.[21]
[19] [2006] NSWSC 449.
[20] (1929) 29 SR (NSW) 578.
[21] Ibid [61].
Brereton J referred to Stenhouse Australia Ltd v Philips,[22] Gilford Motor Company v Horn[23], Sharah v Healey and Bridge v Deacons[24], all cases in which restraints prohibiting the solicitation of all clients of the employer were upheld. His Honour said:
[22] [1974] AC 391.
[23] [19/82] 2 NSWLR 223; [1933] 1 Ch 235.
[24] [1984] 1 AC 705.
63. Heyden (at 127) points out that there are exceptions (1) where the employee knows all the customers; (2) in the case of an employee who may well in one way or another through the employment gain a special influence over or knowledge of the requirements of any of the employers customers, whether he dealt with them or not; and (3) in respect of persons called on by a traveller in the hope of developing the initial contact later.[25]
Brereton J said:
66. Cases such as Stenhouse and Plowman show that a restraint may be reasonable even though it extends beyond customers with whom the employee has personal contact. This is so where, despite the absence of personal contact, influence may be established by, for example, seniority of the employee’s position (as in Stenhouse); or where the employee’s obligation involves developing the business within a target market (as in Plowman). If the employee has gained special knowledge and/or influence of customers or even of potential customers in the course of employment, a covenant may be reasonable notwithstanding that it extends to clients with whom the employee did not have personal contact. Once again, it must be borne in mind that this judgement has to be made when the restraint is taken, and not at the end of the employment, when the position may have evolved. And once again it is to be borne in mind that the precise concurrence of the restraint and the legitimate scope of protection is not necessary.
…
70. This issue is finely balanced. It might be said in favour of validity that when the covenant was taken it was not unreasonable to think that Mr Reeves would acquire some knowledge of and influence over clientele more extensive than those who were serviced by him, and thus to take a covenant restraining solicitation and enticement of or dealing with clientele not limited to those for whom he was responsible. But he was not an overall manager of the business. His confidential relationships would be developed only with those clients who were serviced by him. The contact which he would have with clients other than those he serviced would be incidental, as part of the Koops Martin team, in a context where those other clients had a primary attachment to another financial planner in the team. For those clients, he was not the persona of the firm. Insofar as the restraint would have prohibited solicitation of customers of Koops Martin other than those he services, it was in the circumstances of this case excessive.”[26] (My underlining)
Brereton J concluded:
91. Koops Martin has a legitimate interest founded in customer connection, which it was entitled to protect by requiring a reasonable post- employment restraint from Mr Reeves. The restraint taken went beyond what was reasonably necessary for the protection of that interest insofar as it prohibited soliciting or dealing with customers of Koops Martin who were not serviced by Mr Reeves, and insofar as it prohibited soliciting or dealing with customers of other divisions of the Group. But insofar as it prohibited acceptance of instructions from, as well as soliciting, customers of the financial services company who were serviced by Mr Reeves, it was reasonable, and it was not excessive in area or duration. To that extent, it is valid pursuant to the Restraints of Trade Act, s 4 (1)[27]
[25] Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449 [63]
[26] Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449 [66], [70].
[27] Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449 [91].
In the present case the relevant clauses go beyond prohibiting the acceptance of instructions from or soliciting the customers serviced by Mr Kalic. This case is to be determined by reference to the scope of the restriction in the Deed, not by the extent of any breach.
In Burton and Eising v Wright Trading Pty Ltd[28] the Supreme Court of Queensland an employment contract executed in connection with a business of financial planners and stockbrokers contained a Restraint of Trade clause which provided that the employee would not canvas, solicit or accept work from any person or entity who was during the 12 months preceding the termination of his employment a client of the business. Judge Dutney said with respect to that provision:
[60] If the restraint was limited to solicitation of customers serviced by the applicants within the 12 months preceding the termination of their employment, I would accept that it was justified. This is because of the nature of the relationship between clients and individual employees of WT described above. The restraints in the applicant’s employment contracts go further. For example, the restraint on solicitation covers anyone who was a customer of WT within the preceding 12 months whether or not they had had any contact with the applicants. The restraint on employment is even broader. Having regard to the personal relationship between advisor and client, I do not consider a solicitation restraint that goes beyond the persons with whom the adviser actually dealt can be justified on this basis.[29]
[28] [2007] QSC 17.
[29] Ibid [60].
Another non-solicitation restraint which restrained the employee from dealing with any customer or potential customer, not merely those with whom he had personal contact, was considered by Edelman J in Emco International Pty Ltd v O’Shea.[30]His Honour said there were four reasons why the Non-solicitation and Client Restraints were unenforceable and concluded:
209. For these reasons, although the confidentiality and customer connection interests which Emeco legitimately sought to protect in this case are significant, these interests cannot legitimately extend to the breadth of the Nonsolicitation and Client Restraints which might concern clients about whom Mr O’Shea could reasonably be expected at the date of contract to have had no dealings, about whom he could reasonably be expected at the date of contract to have no particular knowledge, and, in limited cases about whose discussions or negotiations with Emeco (as defined) he might reasonably be expected to have had no means of knowing or recollection. Discussions or negotiations with Emeco (as defined) he might reasonably be expected to have had no means of knowing or recollection.[31]
[30] Emeco International Pty Ltd v O’Shea [2] [2012] WASC 348.
[31] Emeco International Pty Ltd v O’Shea [2] [2012] WASC 348 [209].
His Honour’s observations about clients other than those serviced by the employee are relevant to the present case.
In Commsupport Pty Ltd v Mirow[32] the relevant employment contract contained a restraint of trade provision which prevented the employee from acting for any person or entity that the employer had as a client during the six-month prior to the employment with the employer concluding or contacting any person that the employer had a client with a view to enticing that person to use the professional services of the employee or a third party. Horneman--Wren SC DCJ said:
67. A point upon which restraints often fail in respect is not that the employee sought to be restrained had no such relationship of interest over customers of the employer, but rather the restraint has been drawn so broadly that it applies not only in respect of those customers with whom there was such a relationship, but also to those whom there was no such relationship. The point that the legitimacy of the interest gives way to the restraint being seen as one merely against competition. The employee could be considered to have no more influence over such customers than a stranger. [33]
[32] [2018] QDC 134.
[33] Ibid [67], [68].
His Honour concluded that the restraints were not reasonable and extended beyond what might be adequate to protect the legitimate interests of the employer. He said that the clauses went beyond that which adequately protected the legitimate interests of CCS, were unreasonable as between the parties and were therefore not valid and were not enforceable. He referred to AGA Assistance Australia Pty Ltd v Tokody [34]where McMurdo J said:
The relevant interest to be protected in this respect is the value of the relationships which the defendant had developed with clients and which were acquired in the course of employment. Such relationships are beneficial to the employer, and the benefit is treated as an interest which justifies some reasonable protection upon the cessation of the employment. A restraint upon competition is not justified simply from history of contact between the employee and customers. There must be a relationship of a kind which could make it a contributing factor in a customer’s decision to give its business to a competitor for whom the former employee now works.[35]
Horneman-Wren DCJ said:
88. The element of the restraint in each of subclauses 13.1 (a) and (b) which establishes their unreasonableness as between the parties is its extension to any person or entity which CCS had as a client during the six-month period immediately prior to the conclusion of Mr Mirow’s employment. The inclusion of all clients goes beyond what is adequate to protect the legitimate interests of CCS being its confidential information and its customer connection established through Mr Mirow.[36] [My underlining]
[34] [2012] QSC 176.
[35] Ibid [17].
[36] Commsupport Pty Ltd v Mirow [2018] QDC 134 [88].
I find that insofar as clause 4.6 refers to “clients of the Employer” the provision is too broad and is therefore unreasonable, void and unenforceable. Likewise clause 4.8, the deeming provision, is too broad in that the noun “client” is defined to include “any client for whom the Employer (or any Employee of the Employer) has provided service in the 3 years prior to the termination of the employment of the Employee with the Employer.” Clause 4.8 is also void and unenforceable
The fact that the only clients of the plaintiff whom Mr Kalic is deemed to have solicited were clients with whom Mr Kalic had dealt is irrelevant. The Deed must be interpreted on the basis of the provisions at the time the Deed was executed. The extent of any breach is not relevant to the interpretation of the Deed. The question is what is the nature of the restriction contained in the Deed.
The special circumstances in which a restraint extending to all clients of the employer may be reasonable are referred to in the passage from Heyden cited by Brereton J in Koop Martin. In this case none of those special circumstances apply. The evidence does not establish that Mr Kalic had had any contact with clients of the plaintiff other than his own and the evidence does not establish that he had any special knowledge or influence over clients other than those whom he serviced.
The effect of the Deed is that if the Employee solicits any client of the plaintiff he must pay the value of the client portfolio. I find the restriction on approaching all clients of the plaintiff involves an unreasonable and unnecessary restriction on the Employee’s right to work. It extends beyond protecting the plaintiff’s interest in those clients with whom Mr Kalic dealt. I find that there are no special circumstances in this case which made the restraint of trade reasonable.
Mr Williams referred to authorities that say that a stricter view is taken with respect to a restraint of trade in employment as opposed to a sale of business.[37] That proposition is correct. He submitted that what is being dealt with in this case is akin to the sale of a business.[38] The title of the Deed - Employee Confidentiality and Non-Competition Deed - by itself indicates that the Deed has nothing to do with the sale of the business but is concerned with employment. Similarly, it is clear from the interpretation of the terms of the Deed that it is concerned with an employment relationship, not the sale of the business. I am unable to accept the submission.
[37] T [283.2-5].
[38] T [283.2-5] – [284.1-37].
Mr William sought to distinguish the cases relied upon by Mr Kalic upon the basis that they were cases where the clause provided a restraint simpliciter. He relied upon the speech of Lord MacNaghton in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co-Ltd[39] where his Lordship said:
All interference with individual liberty of action in trading, and/or restraint of trade of themselves, if there is nothing more, are contrary to public policy and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable-reasonable, that is, in reference to the interests of the parties concerned 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.[40]
[39] [1894] AC 535.
[40] Ibid 565.
The plaintiff has not established that the restraint was reasonable.
Mr Williams argued that the common law is concerned about people not being able to work and that is not this case.[41] I have rejected the submission that this case is akin to the sale of the business. For the purpose of interpreting the Deed the relevant time is the time when the Deed was executed.
[41] T [281]
I find that the clauses of the Deed upon which the plaintiff relies are clauses in restraint of trade in an employment contract and are prima facie void. The restraint extends beyond those clients whom Mr Kalic had serviced and none of the exceptions identified by Heyden apply.[42] The evidence does not establish that Mr Kalic knew all of the plaintiff’s customers, the evidence does not establish that while he did not actually come into contact with all of the clients of the plaintiff he was “a person who may well in one way or another through his employment acquire special influence over or knowledge of the requirements of any of the employer’s customers” and the evidence does not establish that he had called on the clients of the plaintiff as a traveller in the hope of developing initial contact plaintiff.
[42] JD Heyden, The Restraint of Trade Doctrine, 3rd edition [165]
With respect to covenants which extend to an employer’s clients Heyden says:
…these covenants can be excessive in that they may prevent the employee from soliciting customers who were not the employee’s customers, over whom the employee had no hold, and in respect of whom the employer has no right to be protected against competition from the employee.” [43]
[43] JD Heyden, The Restraint of Trade Doctrine, 3rd edition, [162]
I find that the covenants in this case are excessive. Also, the formulae for calculating the value of the client portfolio are uncertain. The Deed contains provisions in restraint of trade and the plaintiff has not established that they are reasonable.
The claim of the plaintiff must be dismissed.
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