Crowe Horwath Pty Ltd v Loone
[2016] VSC 582
•26 September 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
EMPLOYMENT AND INDUSTRIAL LIST
S CI 2016 02982
| CROWE HORWATH (AUST) PTY LTD | Plaintiff |
| v | |
| ANTHONY LOONE | Defendant |
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JUDGE: | McDonald J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 26 September 2016 |
DATE OF JUDGMENT: | 26 September 2016 |
CASE MAY BE CITED AS: | Crowe Horwath Pty Ltd v Loone |
MEDIUM NEUTRAL CITATION: | [2016] VSC 582 |
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CONTRACT OF EMPLOYMENT – Enforceability of covenant in restraint of trade – Legitimate interest of plaintiff in protecting its client base – Defendant proposing to establish a business in direct competition with plaintiff – Injunction granted to restrain defendant until the trial of the proceeding from providing services to 89 of the plaintiff’s clients with whom the defendant had direct dealings in the 12 months prior to termination of employment.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A Moses SC and Mr D Guidolin | Mills Oakley |
| For the Defendant | Mr A Rodbard-Bean | Marsh & Maher |
HIS HONOUR:
Until 12 July 2016, Mr Loone was employed by Crowe Horwath Australia Pty Ltd as managing principal of its Launceston Office. At the time of ceasing to be an employee, he was employed under a contract entered into on 1 October 2012. However, he had commenced employment in the business in November of 2000.
Schedule 2 of Mr Loone's contract contains a number of restrictive covenants. For the purposes of the current proceedings, the relevant covenants are prescribed by clauses 3.1(a), (b), (e) and (f). Those covenants are as follows:
3.1Having regard to the acknowledgements set out in clause 1 of this Schedule 2, you will not, during the Restraint Period, either directly or indirectly, on your own account, jointly or with any other person or as an employee or otherwise:
(a)canvass, solicit, entice away or interfere with, or endeavour to canvass, solicit, entice away or interfere with, any Client for the purposes of having services of the nature provided by the relevant Group Member provided by anyone other than a Group Member;
(b)undertake or perform for a Client work of a kind which involves the provision of services which are, in whole or in part, the same as or similar to the services provided by the Company or any Group Company;
…
(e)approach, solicit, encourage or induce any Group Employee or Contractor to leave their employment or cease their engagement;
(f)counsel, procure or otherwise assist any person to do any of the acts referred to in this clause.[1]
[1]Affidavit of Michael Andrew Wilkins sworn 28 July 2016, “MW-3” (emphasis altered).
‘Client’ is defined in cl 31.5 as ‘an entity or person who is or was a client of a Group Member with whom you had direct dealings during the 12 months immediately prior to the cessation of the Employment’.[2] ‘Restraint Period’ is defined in cl 31.20 as:
the period commencing on the date of cessation of the Employment (however that termination may occur) and for a period of:
(a) 12 months;
(b) 9 months;
(c) 6 months;
(d) 3 months.[3]
[2]Ibid.
[3]Ibid.
Mr Loone intends to establish an accounting practice in Launceston. Crowe Horwath contends that if he does so, he will be in breach of the covenants which he has freely entered into. It seeks injunctions, the effect of which will be to limit Mr Loone's capacity to provide services to clients with whom he had direct dealings in the 12 months prior to the cessation of his employment. It also seeks orders which will restrict his ability to solicit existing employees of Crowe Horwath to work in his new business.
The plaintiff's application for interlocutory relief first came before me on 8 August 2016. The proceeding was listed for an expedited hearing to commence on 19 September 2016, on an estimate of three days. On 8 August 2016, Mr Loone, through his counsel, gave various undertakings to the court as recorded in paragraphs 2(a) to (e) of the ‘Other Matters’ section of the orders made on that day.
The effect of those undertakings was to prevent Mr Loone from (1) providing any services to a client as defined until the trial and determination of the proceeding, and (2) participating in any business offering fee for service accounting or financial advisory services in Launceston. As events unfolded, the trial date of 19 September 2016 was vacated pursuant to an order made by her Honour Associate Justice Ierodiaconou on 9 September 2016.
There is a controversy between the parties as to at whose feet lays the blame for the vacating of the trial date. Mr Moses SC, who appears for the plaintiff, contends that the fault is entirely that of Mr Loone and that as such he should not be released from his undertaking. He submits that the primary reason for the trial date being vacated was a counterclaim filed by Mr Loone which will necessitate additional witnesses and discovery.[4]
[4]Transcript of Proceedings, Crowe Horwath Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 26 September 2016) T9 LL17-24, T17 LL26-31, T18 LL18-29.
Mr Rodbard-Bean, who appears for Mr Loone, submitted that the genesis of the counterclaim was a demand made by Crowe Horwath post 8 August 2016 for repayment of a short-term incentive payment of $30,000. He submitted that Mr Loone had no option other than to resist that claim for repayment by joining issue with it in the current proceedings lest he be estopped from doing so.[5]
[5]Ibid T33 LL20-31, T35 LL6-27.
I accept that the origins of the counterclaim post-date the hearing before me on 8 August 2016. I also accept that the plaintiff would have been prejudiced if the trial had proceeded on 19 September 2016. However, the key consideration on the question of whether Mr Loone should be released from his undertakings is whether there has been a material change in circumstances since the giving of the undertaking.[6]
[6]See Brimaud v Honeysett Instant Printing Pty Ltd (1988) 217 ALR 44, 46; AED Oil Ltd v Puffin FPSO Ltd (No.5) [2011] VSC 60.
The overriding principle is that the court should do whatever is in the interests of justice having regard to the particular circumstance of the case. There has been a material change of circumstances as the expedited trial has been vacated. Further, it is not in the interests of justice to hold Mr Loone to undertakings given on the premise of an expedited trial in circumstances where that trial may now not be able to take place until early in the new year.
This is particularly so in circumstances where the undertaking has the effect of preventing Mr Loone from engaging in any form of competitive activity with Crowe Horwath. An undertaking in those terms, operative until a trial which may not now take place until early 2017, goes further than is necessary to protect the legitimate interests of the plaintiff. Mr Loone shall be released from the undertakings he gave on 8 August 2016.
The plaintiff presses for injunctive relief. It seeks an order based on cl 3.1(b) and (e) together with (f) of the covenants. The order based on cl 3.1(b) is to operate by reference to a list of 89 clients.[7] This list of clients records an agreed position as between the parties as to the clients of the plaintiff with whom Mr Loone had direct face to face dealings or was directly involved in the provision of financial and/or accounting advisory services between July 2015 and July 2016.
[7]See affidavit of Adam Lunn sworn 21 September 2016, “ANML-42”.
The plaintiff does not concede that the list constitutes all of the clients as defined in Mr Loone's contract. Indeed, Mr Lunn's tenth affidavit of 16 September 2016 deposes that Mr Loone:
performed work for, or had client account dealings with approximately 881 plaintiff clients in the period July 2015 to July 2016.[8]
[8]Affidavit of Adam Lunn sworn 16 September 2016, [8].
Crowe Horwath has a legitimate interest in protecting its client base. Chief Justice Latham in Lindner v Murdock's Garage[9] stated:
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.[10]
[9](1950) 83 CLR 628.
[10]Ibid 636.
That passage was cited with approval in Birdanco Nominees Pty Ltd v Money.[11] In Birdanco, the Court of Appeal considered the validity of a restraint of trade clause in the following terms:
(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.[12]
[11](2012) 36 VR 341, [44].
[12]Ibid [29].
In reference to that clause, President Maxwell stated:
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. 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.[13]
[13]Ibid [5] (citations omitted).
Robson AJA observed as to the nature of the restraint:
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 cl 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. [14]
[14]Ibid [75]-[76].
As to the reference to liquidated damages in the passage to which I have just had reference, cl 4.1 and 4.2 of the schedule provides:
4.1If you breach any of the restrictions in sub-clauses 3.1(a), (b), (d) or (f) of this Schedule 2 and, as a result, a Group Member loses the work of a Client, you agree that the relevant Group Member may, at its election, require you to pay to the Group Member liquidated damages of an amount equal to 80% of the Total Fees, and you agree that you must pay the liquidated damages to the Group Member on demand by the Group Member.
4.2To avoid doubt, if a Group Member elects not to require you to pay liquidated damages under clause 4.1 of this Schedule 2, the Group Member may seek any other relief or remedy...[15]
[15]Affidavit of Michael Andrew Wilkins sworn 28 July 2016, “MW-3”.
It is not in issue in the current proceedings that Crowe Horwath has elected not to require Mr Loone to pay liquidated damages.
The duration of the restraint under Mr Loone's contract is a maximum of 12 months. In Birdanco, the Court of Appeal upheld the validity of a restraint of three years duration. Robson AJA stated:
Justice Heydon suggests a test that has particular relevance in this case: “how soon the hold of the old employee over customers will weaken: that is, 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?”
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.[16]
[16]Birdanco Nominees Pty Ltd v Money (2012) 36 VR 341, [82]-[84] (citations omitted).
Having regard to the decision of the Court of Appeal in Birdanco, it is strongly arguable that clause 3.1(b) of Schedule 2 of the contract is a valid restraint for a period of 12 months. It is true clause 3.1(b) goes further than a non-solicitation clause. However, in the circumstances of the present case, this is reasonable. First, there is the seniority and length of service of Mr Loone. When he entered into the contract in October 2012, he had already been working in the business for 12 years and will have doubtless established close client connections during that period. The strength of those connections is such that clause 3.1(a), the non-solicitation provision, is unlikely to offer adequate protection to the plaintiff in respect of the 89 clients with whom Mr Loone had direct dealings in the 12 months between July 2015 and July 2016.
In the meantime, clause 3.1(b) does not prevent Mr Loone from establishing an accounting business, nor does it prevent him from providing services to approximately 90 per cent of Crowe Horwath's existing clients, ie. the balance of the 881 clients deposed to by Mr Lunn. Subject to consideration of Mr Loone's repudiation argument to which I shall turn in a moment, giving effect to clause 3.1(b) is the best way of achieving a balance between the legitimate interests of the plaintiff in protecting its goodwill and its client base, that is, clients with whom Mr Loone had direct dealings during the 12 months prior to July 2016, and the legitimate interest of Mr Loone in being able to establish his own business and earn a living.
I turn now to Mr Loone's repudiation argument. Mr Loone contends that he had an oral agreement with the plaintiff that any accounting business acquired by Crowe Horwath would be brought into the calculation of bonus for principals, including himself, working in the Launceston office.[17] He contends that the plaintiff breached this agreement and thereby repudiated his contract of employment.[18] He contends that the plaintiff is thereby precluded from enforcing the covenants in cl 3 of Schedule 2 because the contract was brought to an end pursuant to the plaintiff's own wrongdoing.[19]
[17]‘Defendant’s Amended Short Points of Contention’ filed 6 September 2016, [2].
[18]Ibid [4].
[19]Ibid [6].
This argument faces a number of hurdles. First, cl 7.5 of Mr Loone's contract expressly provides that:
The Company will determine from time to time, at its absolute discretion, the amount of any bonus payment that may be made to you.[20]
Second, cl 29 prescribes an entire agreement clause.[21] The oral agreement which Mr Loone seeks to rely upon is prima facie inconsistent with the express terms of his contract.
[20]Affidavit of Michael Andrew Wilkins sworn 28 July 2016, “MW-3”.
[21]Ibid.
The views I am expressing are necessarily at an interlocutory stage of the proceeding. Nevertheless, subject to that caveat, when assessing the competing strengths of the plaintiff's claim based on the enforceability of cl 3.1(b) of Schedule 2 as against the defendant's contention that the plaintiff repudiated his contract of employment, I have concluded that the plaintiff's claim is strongly arguable, whereas the defendant's repudiation claim is simply arguable.
As to whether damages are an adequate alternative remedy, I accept Mr Moses's submission that absent an injunction enforcing cl 3.1(b), there would be significant difficulties attending the quantification of damages in circumstances where any of the 89 clients leave Crowe Horwath and become clients of Mr Loone's prior to the effluxion of the restraint period.
I accept that there is a monetary value, difficult to assess, constituted by the loss of opportunity to retain the 89 clients as clients of Crowe Horwath. The plaintiff is entitled to an opportunity to build new client relationships, utilising the services of other employees, with the 89 clients with whom Mr Loone had direct dealings in the 12 months prior to the cessation of his employment.
Further, there is a question as to the difficulty in proving that any loss flowing from the departure of a client has been caused by Mr Loone acting in breach of a covenant. It is well established that it is a rare case involving the enforcement by injunction of a negative covenant that relief will be declined on the basis that damages are a sufficient remedy.[22]
[22]See Willis Australia Group Services Pty Ltd v Griggs (2012) 222 IR 172, [129]-[132]. See also Cerilian Pty Ltd v Graham Fraser[2008] NSWSC 1016, [10]; Otis Elevator Company Pty Ltd v Nolan[2007] NSWSC 593, [17]–[30]; IceTV v Duncan Ross[2007] NSWSC 635; Huhtamaki Australia Ltd v Botha[2004] NSWSC 386, [17].
It follows from the matters set out above, that the plaintiff is entitled to an injunction enforcing cl 3.1(b) of the second schedule by reference to the 89 clients who are listed in Exhibit ANML-42 to the affidavit of Adam Lunn, sworn 21 September 2016. The order of the court will attach the list as Annexure A to the order.
As to the claim for injunctive relief seeking enforcement of cl 3.1(e), the plaintiff plainly has a legitimate interest in retaining existing employees. In circumstances where Mr Loone has a clearly stated intention to establish a business in competition with the plaintiff and is not prevented by the court's order from doing so, there is a risk that existing employees of a plaintiff may wish to join Mr Loone's new business.
Unlike cl 3.1(b), cl 3.1(e) does not operate as a prohibition upon Mr Loone employing an existing employee of the plaintiff. However, cl 3.1(e) does restrain Mr Loone or any entity in which he has an interest from initiating contact with an existing employee of the plaintiff with a view to recruiting that employee.
Mr Loone has proffered an undertaking to the court that until the trial and determination of this proceeding, or if the proceeding is otherwise resolved by further order, that he will not initiate contact with or initially approach any person presently employed by the plaintiff with a request to leave their employment with the plaintiff and to work with the defendant.
Subject to hearing from Mr Moses, I am presently minded to accept an undertaking in the form of the undertaking which has been proffered. That is consistent with the well-established practice that a court will not enforce by injunctive order that which is the subject of a reasonably formulated undertaking.
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