Freedom Finance Accounting Pty Ltd v Goldstein
[2017] VSC 179
•10 April 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
EMPLOYMENT AND INDUSTRIAL LIST
S CI 2017 00906
| FREEDOM FINANCE ACCOUNTING PTY LTD (ACN 600 717 100) | Plaintiff |
| v | |
| THEODORE EDWARD GOLDSTEIN & ANOR (in accordance with the schedule attached) | Defendants |
---
JUDGE: | McDonald J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 23 March 2017 |
DATE OF JUDGMENT: | 10 April 2017 |
CASE MAY BE CITED AS: | Freedom Finance Accounting Pty Ltd v Goldstein |
MEDIUM NEUTRAL CITATION: | [2017] VSC 179 |
---
CONTRACT – Sale of business agreement – Restraint of trade – Enforceability of covenant in restraint of trade – Legitimate interest of purchaser in protecting goodwill in business acquired – Whether restraint unreasonable – Strongly arguable that restraint unreasonable – Strongly arguable that contract should not be severed – application for injunction dismissed.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D Mahendra and Ms J Alderson | Nexus Lawyers |
| For the First Defendant | Mr J Tracey | Kelly Hazell Quill Lawyers |
| For the Second Defendant | No appearance |
HIS HONOUR:
On 10 February 2015, Mr Goldstein and the plaintiff entered into an agreement pursuant to which the plaintiff purchased the accounting firm Farrell Goldstein (trading under the name Goldpats) in which Mr Goldstein was a 50 per cent shareholder (‘the Agreement’). The purchase price was $716,595. Mr Goldstein’s 50 per cent shareholding meant that he received $358,500 for the purchase price. The completion date for the sale was 1 May 2015. Thereafter, in accordance with the terms of the Agreement, Mr Goldstein continued to work for the plaintiff.
In addition to receiving $358,500 for the sale of his share in Goldpats, Mr Goldstein acquired 17.5 per cent equity in the plaintiff. From late 2016 until February 2017, there were discussions between Mr Goldstein and the plaintiff regarding the sale of his 17.5 per cent equity. There were also discussions regarding the prospect of Mr Goldstein terminating his employment and acquiring a ‘client list’ from the plaintiff in exchange for his equity. There is a dispute as to the detail of these discussions. It is neither necessary nor possible to resolve that dispute based on the material presently before the Court.
On 28 February 2017, Mr Goldstein resigned from his employment. He has recently commenced work, consulting to a small accounting firm in Prahran. He wishes to continue providing accounting services to clients whom he previously serviced whilst an employee of the plaintiff.
The Agreement contained restrictive covenants operating for up to three years from 1 May 2015. Clause 16 of the agreement is as follows:
16.1 The restraints
Except as permitted by clause 16.3, each Warrantor must not, directly or indirectly:
(a)(non-compete): within the Non-Compete Area, be involved with a Restrained Business;
(b)(business interference): Interfere with any business activity connected with the Business, or do anything which may prejudice the Buyer’s ability to provide Accounting Services;
(c)(business name): use a name intended, or likely to be confused with, a business name or any other name used by the Buyer, including Goldpats.
(d)(providing services): provide Accounting Services to any Client, former client or Potential Client. For the avoidance of doubt, if a Client makes an approach or initiates contact, then Accounting Services must not be provided to that Client;
(e)(client solicitation) approach, contact or solicit any Client, former client or Potential Client for the purpose of obtaining that person as a client for any Accounting Service;
(f)(client interference): persuade a Client to stop receiving Accounting Services from the Buyer;
(g)(refer clients away): refer a Client, former client or a Potential Client to another accounting practice or any third party to obtain Accounting Services;
(h)(maintain confidentiality): disclose or divulge to any third party any information of a secret or confidential nature relating to a Client, including Client information, except as permitted under clause 17;
(i)(recruitment): employ, engage or entice away any officer, employee or independent contractor of the Buyer;
(j)(referral sources): contact any person who is a referrer of business or clients to the Seller as at the Completion Date, or any person who was a referrer of business or clients to the Seller during the 12 months preceding the Completion Date, for the purpose of obtaining that person as referrer of business, clients or prospective clients for any Accounting Service;
(k)(referral clients): provide Accounting Services to any person who is referred to it (directly or indirectly) by a person described in paragraph (j);
(l)(indirect action): perform any action restricted under this clause 16.1 in any manner or by any means:
(i)in any Capacity;
(ii)personally or by or through any other person (including any interposed person);
(iii)on account of any other person; or
(iv)verbally or by any letter, circular, advertisement or document;
(m)(procurement and attempts): procure, counsel or, to the extent of its power and control, permit any person, or attempt to perform, any action restricted under this clause 16.1; or
(n)(Non-Accounting Services) do any action restricted under this clause 16.1 in relation to Non-Accounting Services.
16.2 Duration of restraints
The undertakings in clause 16.1 begin on the Completion Date and end:
(a)on the third anniversary of the Completion Date; or if that period is held to be unenforceable,
(b)on the second anniversary of the Completion Date; or if that period is held to be unenforceable,
(c)on the first anniversary of the Completion Date.
16.3 Permitted involvement
This clause 16 does not restrict a Warrantor from:
(a)performing any agreement with the Buyer; or
(b)acting in any manner consented to by the Buyer.
16.4 Interpretation of restraints
(a)Clauses 16.1, 16.2, and each defined term (or, where present, each alphabetical or numerical paragraph of a defined term) used in clause 16.1 (defined term), have effect together as if they consisted of separate provisions, each being severable from the other.
(b)Each separate provision results from combining each undertaking in clause 16.1, with each period in clause 16.2 and combining each of those combinations with each defined term.
(c)If any of those separate provisions is invalid or unenforceable for any reason, the invalidity or unenforceability does not affect the validity or enforceability of any of the other separate provisions or other combinations of the separate provisions of clauses 16.1, 16.2 and each defined term.
(d)Without limiting subclauses (a) to (c), for the purposes of interpreting clause 16.1(n):
(i)Restrained Business in clause 16.1 means each business or operation that provides the same or similar Non-Accounting Services as those provided by the Buyer;
(ii)Non-Accounting Services means any service or product provided by the Buyer after Completion that is not an Accounting Service; and
(iii)the word “Non-Accounting Services” is substituted for each instance of “Accounting Services” in clause 16.1.[1]
[1]Affidavit of Daniel Rake sworn 15 March 2017, “DR-1”, 17–8.
Clause 16 refers to a number of defined terms:
Accounting Services any of the activities listed below:
(a) audit services;
(b)advisory and consulting services, such as advising businesses on how to implement new accounting standards, business structures or business plans and conducting transactions, initial public offerings and due diligence;
(c) business tax services;
(d) personal tax services;
(e) bookkeeping;
(f)any service that requires a limited Australian Financial Services license, such as limited financial services (as defined in the Corporations Regulations 2001 (Cth)).
…
Assetseach of the following assets of, or used in or for, the Business:
(a)all rights in connection with the provision of the Accounting Services to the Clients;
(b)all rights to Client Revenue;
(c)all Client Information;
(d)all Business Records;
(e)the Equipment;
(f)the Enterprise IP;
(g)all rights in and to, and the benefit of, the Internet Assets;
(h)all work in progress, which is all consultations, attendances or work done by the Seller in the Business in respect of Clients before the Completion Date, where a tax invoice has not been issued by the Seller to those Clients before Completion;
(i)the goodwill and positive business relationships in respect of the Clients and the Business;
(j)all invoicing systems, all data processing information, storage data and retrieval systems, computer records, software, tapes, disks, archives, library and all ancillary data systems, documentation and data storage equipment; and
(k)any other asset that is required for the continued operation of the enterprise constituting the Business.
…
Business: the business of providing Accounting Services to the general public, including the Clients, conducted by the Seller before Completion and by the Buyer after Completion.
…
Non-Compete Area: (a) a 100 kilometre radius around the Business Premises; or if that area is held to be unenforceable,
(b)a 50 kilometre radius around the Business Premises; or if that area is held to be unenforceable,
(c)a 20 kilometre radius around the Business Premises; or if that area is held to be unenforceable,
(d)a 10 kilometre radius around the Business Premises.
…
Restrained Business: each business or operation that provides the same or similar Accounting Services as those provided by the Business.[2]
[2]Ibid 43–4, 50.
On 15 March 2017, the plaintiff filed a summons seeking injunctive relief against the first defendant. The summons was listed for hearing on 16 March 2017. As at 16 March 2017 the second defendant, a former employee of the plaintiff, had not been served with the summons. The application was adjourned until 23 March 2017 to provide Mr Goldstein with an opportunity to file an affidavit in response to the material filed by the plaintiff.
The plaintiff’s application for interlocutory relief is underpinned by the restraints in cl 16.1. The plaintiff seeks the following orders:
the first defendant will not in any manner, or by any means, in any capacity, personally or by or through any other person (including any interposed person), in account of any other person or by any letter, circular, advertisement or document:
a.interfere with any business activity connected to the plaintiff, or do anything which may prejudice the plaintiff’s ability to provide Accounting Services;
b.use a name intended, or likely to be confused with, a business name or any other name used by the plaintiff, including Goldpats;
c.provide Accounting Services to a Client of a kind which involves the provision of services which are in whole or in partner [sic] the same as or similar to the services provided by the plaintiff to that Client;
d.approach, contact or solicit any Client, former client or potential client of the plaintiff for the purpose of obtaining that person as a client for any Accounting Service;
e.persuade a Client to stop receiving Accounting Services from the plaintiff;
f.refer a Client, former client or a Potential Client of the plaintiff to another accounting practice or any third party to obtain Accounting Services;
g.Disclose or divulge to any third party any information of a secret or confidential nature relating to a Client of the plaintiff, including Client information;
h.employ, engage or entice away any officer, employee or independent contractor of the plaintiff;
i.contact any person who is a referrer of business or Clients to the plaintiff;
j.procure, counsel or, to the extent of his power and control, permit any person, or attempt to perform, any action restricted under these orders.[3]
[3]Proposed order of the Plaintiff dated 23 March 2017, [2].
During the course of the hearing on 16 March 2017, I pointed out to Mr Mahendra, who appeared with Ms Alderson for the plaintiff, that there was no evidence before the Court identifying the clients of the plaintiff the subject of the claim for injunctive relief. In so far as the plaintiff sought to restrain Mr Goldstein from providing accounting services to the plaintiff’s clients, there was no evidence identifying the clients.
The clients the subject of the plaintiff’s claim are those listed in ‘Annexure A’ to the Agreement. Mr Tracey, who appeared for Mr Goldstein, put in issue whether the client list, ‘Annexure A’, had in fact been annexed to the Agreement at the time it was executed.[4]
[4]Transcript of Proceedings, Freedom Finance Accounting Pty Ltd v Goldstein (Supreme Court of Victoria, S CI 2017 00906, McDonald J, 23 March 2017) T50 LL9-22.
An affidavit sworn by Daniel Rake on 22 March 2017, exhibited the client list as ‘DR- 1’. He deposed that:
Exhibited to my first affidavit sworn on 15 March 2017 is a copy of the Business Sale Deed executed by the parties on 10 February 2015. I become [sic] aware during the first hearing of this matter on 16 March 2017 that the client list at Annexure A of the Business Sale Deed had inadvertently been omitted from exhibit “DR-1”. The client list at Annexure A is the client list that the plaintiff purchased from Farrell Goldstein & Associates Pty Ltd (of which the first defendant is a director and 50% shareholder) (Purchased Client List). This client list is attached to this affidavit and marked [“DR-1”].[5]
[5]Affidavit of Daniel Rake sworn 22 March 2017, [4].
Mr Tracey submitted that this was not evidence that Annexure A formed part of the Agreement executed by Mr Goldstein on 10 February 2015.[6] He submitted that his instructions were that when the Agreement was executed there was no client list annexed thereto.[7] He submitted that the evidence before the Court did not permit a different conclusion.[8] He pointed to the fact that Exhibit DR-1 to Mr Rake’s affidavit of 22 March 2017 is dated 4 February 2015, whereas the Agreement was executed on 10 February 2015.
[6]Transcript of Proceedings, Freedom Finance Accounting Pty Ltd v Goldstein (Supreme Court of Victoria, S CI 2017 00906, McDonald J, 23 March 2017) T50 LL9-15.
[7]Ibid T50 LL20-22.
[8]Ibid T51 LL19-22.
The evidence before the Court does not provide a sound foundation for a finding of fact that the client list, DR-1 to Mr Rake’s affidavit of 22 March 2017, was annexed to the Agreement when it was executed on 10 February 2015. The definition of ‘Client’ in the Agreement is ‘a person listed in the Client List’.[9] ‘Client List’ is defined as ‘the list of the clients of the Business that is attached to this deed as Annexure A’.[10] If in fact there was no list attached to the Agreement at the time of its execution, a question arises as to whether covenants in the Agreement which operate by reference to the definition of ‘Client’ are enforceable. In this regard, it is to be noted that cl 22.10 of the Agreement prescribes an entire agreement clause. Clause 22.10(b) provides that the only enforceable obligations and liabilities of the parties in relation to the subject matter are those that arise out of the provisions contained in the Deed.[11]
[9]Affidavit of Daniel Rake sworn 15 March 2017, “DR-1”, 45.
[10]Ibid 46.
[11]Ibid 25.
I am not satisfied on the evidence before the Court that Exhibit DR-1 to the affidavit of Daniel Rake sworn 22 March 2017 was annexed to the Agreement at the time it was executed. The consequence of this is that the definition of Client in the Agreement has no reference point. However, if I am wrong in reaching this conclusion, the covenant in cl 16.1 is still unlikely to be held to be enforceable at trial.
Mr Mahendra submitted that the restraints in cl 16 are valid.[12] He placed weight on the fact that the restraints constitute the terms of the Agreement, freely entered into by parties with equal bargaining strength.[13]
[12]Transcript of Proceedings, Freedom Finance Accounting Pty Ltd v Goldstein (Supreme Court of Victoria, S CI 2017 00906, McDonald J, 23 March 2017) T20 LL20–24.
[13]Ibid T9 LL2–5.
The principles governing the enforceability of restraint of trade clauses are well settled:
(a) a contractual provision in restraint of trade is, prima facie void.
(b)The presumption can, however, be rebutted and the restraint justified by the special circumstances of a particular case, if the restriction is reasonable by reference to the interests of the parties.
(c)The validity of the covenant in a contract is to be judged as at the date of the Employment Agreement.
(d)A stricter view is taken of covenants in restraint of trade in employment contracts than those contained in contracts for the sale of a business.
(e)The onus of proving the special circumstances justifying the restraint is on the person seeking to enforce the covenant.
(f)So far as the parties’ interests are concerned, the restraint must impose no more than adequate protection to a party in whose favour it is imposed. If the court is satisfied that the restraint confers greater protection than can be justified, there is no further issue of reasonableness.
(g)The meaning of the restraint clause may be construed by reference to the factual matrix, documentary context and surrounding circumstances.[14]
[14]Wallis Nominees (Computing) Pty Ltd v Pickett (2013) 45 VR 657, [14].
In Just Group Ltd v Peck,[15] the Court of Appeal stated:
A term in a contract, which is a restraint of trade (‘a restraint clause’), is presumed to be void as contrary to public policy.
The presumption may be rebutted if there are special circumstances that demonstrate the covenant to be:
(a) reasonable as between the parties; and
(b) not unreasonable in the public interest.
The test of reasonableness varies depending on ‘the situation the parties occupy and so recognising different considerations which affect employer and employee and independent traders or business men, particularly vendor and purchaser of the goodwill of a business’. A court takes a ‘stricter view’ of restraint clauses in employment contracts; and will more readily uphold a restraint clause in favour of a purchaser of the goodwill of a business than a restraint clause in favour of an employer. In particular, a purchaser of a business is entitled to protect itself from competition by the vendor; but an employer is not entitled to protect itself from competition per se by an employee.[16]
[15][2016] VSCA 334.
[16]Ibid [30]–[32] (citations omitted).
In Butt v Long,[17] Dixon CJ identified the characteristics distinguishing the purchaser of the goodwill of a business from that of an employer seeking to restrain competitive activity by an employee. His Honour stated:
A distinction is drawn between the position of the purchaser of the goodwill of a business taking a covenant in restraint of trade from his vendor and the case of the owner of a business taking such a covenant from his servant or apprentice. The goodwill of a business is immune from the danger of the owner exercising his personal knowledge and skill to its detriment and if the purchaser is to take over such goodwill with all its advantages it must in his hands remain similarly immune. Without, therefore, a covenant on the part of the vendor against competition, a purchaser would not get what he is contracting to buy, nor could the vendor give what he is intending to sell. The covenant against competition is therefore reasonable if confined to the area within which it would in all probability enure to the injury of the purchaser.[18]
[17](1953) 88 CLR 476.
[18]Ibid 486 (citations omitted).
The authorities distinguish between the enforceability of a restrictive covenant in circumstances where the covenantee is the purchaser of goodwill in a business, compared to circumstances where the covenantee is an employer. As is demonstrated by the present case, that distinction is not always clear-cut. From 1 May 2015, Mr Goldstein became an employee of the plaintiff. The orders which the plaintiff seeks have all the hallmarks of injunctive relief sought by an employer seeking to protect its legitimate interests in its client base from solicitation by a former employee. The catalyst for the current application was the termination of Mr Goldstein’s employment on 28 February 2017. Plainly, there is a strong connection between the circumstances underpinning the plaintiff’s application for injunctive relief and the employment relationship which existed between it and Mr Goldstein.
It is arguable, as submitted by Mr Tracey, that the enforceability of cl 16 should be considered on the basis that it is an employment covenant rather than a goodwill covenant.[19] Nevertheless, I approach the issue of the enforceability of cl 16 from the premise that it is a goodwill covenant rather than an employment covenant. First, the clause is a term of a sale of business agreement. Second, the clients of Mr Goldstein’s accounting firm constitute an asset which was sold. Third, he was paid $358,500. Fourth, the covenant commenced operation immediately upon the completion of the sale on 1 May 2015, and its operation was not triggered by the termination of his employment. Fifth, there is no suggestion of inequality of bargaining position between the plaintiff and Mr Goldstein at the time the Agreement was negotiated.
[19]Transcript of Proceedings, Freedom Finance Accounting Pty Ltd v Goldstein (Supreme Court of Victoria, S CI 2017 00906, McDonald J, 23 March 2017) T60 L24 – T61 L6.
The plaintiff, as the purchaser of the goodwill in Mr Goldstein’s accounting business is entitled to reasonable protection of that goodwill. As Judd J observed in Allison v BDO (NSW–Vic) Pty Ltd:[20]
There can be no doubt that the purchaser of goodwill is entitled to reasonable protection of the goodwill. That is a matter which will be prominent in the mind of a court in deciding whether or not a restraint is enforceable.[21]
[20][2010] VSC 35.
[21]Ibid [8].
The plaintiff’s entitlement to protection of the goodwill it purchased raises two questions:
(i) What was the goodwill in Mr Goldstein’s accounting firm which it acquired; and
(ii) Do the restraints in cl 16 afford no more than adequate protection of that goodwill?
Mr Goldstein’s accounting firm was based in McKinnon, a suburb in Melbourne. The firm was solely engaged in the business of accounting. It did not provide non-accounting services such as financial planning.
The principal interest of a covenant taken on the sale of goodwill is customer connection. However, the covenant is for the protection of the business sold, not the goodwill of the business already owned by the purchaser.[22]
[22]Cream v Bushcolt Pty Ltd (2004) ATPR 42–004, [58]; J D Heydon, The Restraint of Trade Doctrine (LexisNexis Butterworths, 3rd ed, 2008) 197.
The test of the reasonableness of a goodwill covenant therefore focuses upon what is necessary to protect the goodwill in the business which has been sold. In British Reinforced Concrete Co v Schelff,[23] Younger LJ stated:
It is the business sold which is the legitimate subject of protection, and it is for its protection in the hands of its purchaser, and for its protection only, that the vendor’s restrictive covenant can be legitimately exacted.[24]
[23][1921] 2 Ch 563.
[24]Ibid 574.
Heydon summarises the relevant principle as follows:
Similarly, a covenant not to enter ‘any business competing or liable to compete in any way with that for the time being carried on’ by the buyer is void because it is framed with reference to the buyer’s future activities, not the scope of the seller’s business at the time of sale. A covenant not to deal in ‘real or imitation jewellery’ was held too wide where the seller’s business was only that of a dealer in imitation jewellery. An agreement not to enter businesses ‘similar’ to that sold was bad because the only business capable of protection was the one sold. An agreement by the seller of a fat and bone business to stay out of the soap business was held bad, as was a covenant restraining the seller of retail food business from competing with that or any other business. Agreements not to enter ‘business’ are bad unless limited to the business formally carried on by the covenantor.[25]
[25]J D Heydon, The Restraint of Trade Doctrine (LexisNexis Butterworths, 3rd ed, 2008) 203–4 (citations omitted).
Having regard to the principles set out above, I consider that the plaintiff has poor prospects of establishing at trial that cl 16 is enforceable. The sole business of Mr Goldstein’s accounting firm was the provision of accounting services. Clause 16.1(n) provides that Mr Goldstein must not, directly or indirectly:
do any action restrictive under clause 16.1 in relation to Non-Accounting Services.
‘Non-Accounting Services’ is defined in cl 16.4(d)(ii) as ‘any service or product provided by the Buyer after Completion that is not an Accounting Service’.
I have set out earlier in this judgment the definition of ‘Business’. That definition makes clear that the restraints imposed by cl 16 operate not only by reference to the accounting business conducted by Goldpats prior to 10 February 2015, but also by the business conducted by the plaintiff post that date. Further, cl 16.4(d)(i) provides that for the purposes of interpreting cl 16.1(n):
Restrained Business in clause 16.1 means each business or operation that provides the same or similar Non-Accounting Services as those provided by the Buyer.
The effect of the provisions set out above is to restrain Mr Goldstein from providing Non-Accounting Services to clients of the plaintiff until 1 May 2018. The restraint is framed by reference to the plaintiff’s activities post 1 May 2015, rather than the scope of Goldpats’ business at that time. Thus, the covenant imposes a restraint which extends well beyond the goodwill of Mr Goldstein’s accounting business acquired in February 2015.
It is unlikely that any invalidity can be cured by severance. In order to cure the invalidity flowing from the restraints operating by reference to:
(iii) the plaintiff’s business post 1 May 2015; and
(iv) Non-Accounting Services provided by the plaintiff,
it would be necessary to sever:
(a) Clause 16.1(n);
(b) Clause 16.4(d); and
that part of the definition of ‘Business’: ‘…and by the Buyer after Completion’.
In Wallis Nominees (Computing) Pty Ltd v Pickett,[26] the Court of Appeal stated:
In SST Consulting Services Pty Ltd v Rieson, the High Court explained that the relevant question for severance in restraint of trade cases was:
…whether the covenantee can enforce the restraining covenant to the extent to which it would have been valid had it been narrowly drafted. The answer is that the covenantee can do so if the parts which are too wide can be removed without altering the nature of the contract and without having to add to, or modify, the wording in any other way than by excision.
Thus there are two clear parts to the test. The first is that the impugned part must be capable of simply being removed – as if simply crossed out with a blue pen; a court can remove words from a restraint clause but not rewrite it. Secondly, the part to be severed must be an independent covenant and capable of being removed without affecting the meaning of the remaining part.[27]
[26](2013) 45 VR 657.
[27]Ibid [93]–[94] (citations omitted).
Deleting clause 16.1(n) would fundamentally alter the agreement between the parties. It would alter the nature of the contract by deleting the provision of Non-Accounting Services from the operation of the restraint. The same observation can be made in respect of the potential severance of the definition of Business which includes the business activities of the plaintiff post 1 May 2015. Severance of these provisions would alter the nature of the agreement. It is no function of the court via severance to rewrite the parties’ agreement. It is unlikely at trial that the impugned provisions would be severed. If the impugned provisions are not severed, the result is that cl 16.1 provides more than adequate protection of the plaintiff’s interest in protecting its goodwill in the business it acquired. Consequently, the clause is unenforceable.
Thus far, I have focused on the invalidity of cl 16.1 arising from the operation of cl 16.1(n), and the definitions of Non-Accounting Services and Restrained Business. Even if the reference to Non-Accounting Services arising from cl 16.1(n) is excised, the definition of Accounting Services includes ‘any service that requires a limited Australian Financial Services license, such as limited financial services (as defined in the Corporations Regulations 2001 (Cth))’.
‘Limited financial services’ is defined in reg 7.6.01BA of the Corporations Regulations 2001 (Cth) as follows:
(a) financial product advice on self-managed superannuation funds;
(b)financial product advice on superannuation products in relation to a person’s existing holding in a superannuation product but only to the extent required for:
(i)making a recommendation that the person establish a self-managed superannuation fund; or
(ii)providing advice to the person on contributions or pensions under a superannuation product;
(c) class of product advice on the following:
(i) superannuation products;
(ii) securities;
(iii) simple managed investment schemes;
(iv) general insurance products;
(v) life risk insurance products;
(vi) basic deposit products;
(d) arrange to deal in an interest in a self-managed superannuation fund.
When the definition of Accounting Services is read in conjunction with the definition of ‘limited financial services’ in the Corporations Regulations 2001 (Cth), the meaning of Accounting Services is extended to financial services advice of a type which was never provided by Mr Goldstein either prior to, or subsequent to, 1 May 2015.[28]
[28]Affidavit of Theodore Goldstein affirmed 21 March 2017, [34].
The term ‘Accounting Services’ appears repeatedly throughout cl 16.1. The effect of the extended definition of Accounting Services as set out above, is that the restraints imposed by cl 16.1 go well beyond protecting the plaintiff’s interests in the goodwill in the business it acquired on 1 May 2015. The reason for this is that cl 16.1 has the effect of restraining Mr Goldstein from providing services of a type which he never provided to clients of Goldpats prior to 1 May 2015.
I have set out earlier in this judgment the geographical restraint which arises from the definition of ‘Non-Compete Area’.
There is no evidence that as at 10 February 2015 the Goldpats business had clients spread far and wide throughout Victoria. The plaintiff bears the onus of establishing the reasonableness of the restraint. The restraints arising from the definition of Non-Compete Area may be severable. Nevertheless, in assessing the strengths of the plaintiff’s case, it is legitimate to take into account the breadth of the geographic restraints. It is unlikely, absence severance, that the Non-Compete Area insofar as it operates from a radius of 100 kilometres and/or 50 kilometres of the McKinnon premises would be enforceable.
Clause 16.1(i) provides that Mr Goldstein must not, directly or indirectly:
(i)(recruitment): employ, engage or entice away any officer, employee or independent contractor of the buyer.
In Allison v BDO (NSW–Vic) Pty Ltd,[29] Judd J considered the enforceability of a restraint in a sale of business agreement which provided:
The restrictive activities are:
…
(c)employing, soliciting, engaging or enticing away from the Business or the Buyer Group any person who was at any time during the period of 12 months before those times was an officer, manager, consultant or employee of the Business or the Buyer Group whether or not that person would commit a breach of contract by reason of leaving the Business or the Buyer Group.[30]
[29][2010] VSC 35.
[30]Ibid [7].
His Honour stated:
The applicants’ approach to this application echoes, in my opinion, a fundamental problem with the enforceability of cl 16.2(c). Clause 16.2(c) does not discriminate between employees who may be critical to the applicants’ business and those who may not. It is indiscriminate. It is not confined to employees who are in possession of confidential information, or who may be of particular importance because of their client relationships, or who may be engaged in long term projects that would cause major disruption if they were to leave the business or become employed by a competitor. It is a general restraint, without limitation as to type, quality, experience, seniority or otherwise of the employee.[31]
[31]Ibid [28].
Judd J’s observations regarding the enforceability of cl 16.2(c) apply equally to the potential enforceability of cl 16.1(i). Clause 16.1(i) is properly described as a ‘general restraint, without limitation as to type, quality, experience, seniority or otherwise of the employee’. It is strongly arguable that cl 16.1(i) is invalid.
As noted earlier in this judgment, the restraints imposed by cl 16.1 operate for a period ranging from three years down to 1 year. In Birdanco Nominees Pty Ltd v Money,[32] the Court of Appeal upheld the validity of an employee covenant in restraint of trade which operated for 3 years post termination of employment. Critical to the Court’s reasoning was the close client connection between an accountant and the clients he had advised during the course of his employment.[33] This is a significant point of distinction with the covenant in cl 16.1. The definition of Client is not constrained by reference to whether Mr Goldstein had direct dealings with the client. The list of clients in Exhibit DR-1 constitutes all clients of Goldpats in February 2015, including clients with whom Mr Goldstein had no dealings. The reasonableness of the duration of a goodwill covenant is determined by reference to the time necessary for the purchaser to obtain and consolidate the existing business for the purchaser’s benefit so as to enable him to harvest the goodwill that he has purchased.[34] It is strongly arguable that a covenant precluding Mr Goldstein from providing accounting services to all of the clients listed in Exhibit DR-1 for a period of 3 years provides more than adequate protection to the legitimate interests of the plaintiff. At trial it is likely that a period of 2 years, expiring 1 May 2017, would be held to be enforceable.
[32](2012) 36 VR 341 (‘Birdanco’).
[33]Ibid [82]-[84].
[34]Fleming Bros (Monaro Agencies) Pty Ltd v Smith (1983) ATPR 40-389, 44,572.
I accept Mr Tracey’s submission that the Court’s assessment of the strength of the plaintiff’s case bears upon consideration of the balance of convenience.[35] Where a serious question is found to exist but deemed by the court to be a weak one, that is a fact attending against the grant of interlocutory relief in the court’s consideration of the balance of convenience.[36]
[35]‘Outline of Submissions of the First Defendant’ dated 23 March 2017, [32]; Transcript of Proceedings, Freedom Finance Accounting Pty Ltd v Goldstein (Supreme Court of Victoria, S CI 2017 00906, McDonald J, 23 March 2017) T45 LL21–31.
[36]Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148, 155 (Mason ACJ); Bullock v Federated Furnishing Trades Society of Australasia [No 1] (1985) 5 FCR 464, 472 (Woodward J, Sweeney J agreeing).
Mr Mahendra submitted that there was a real risk of potential damage to the plaintiff’s business if Mr Goldstein is free to solicit clients.[37] He referred to the potential for a significant reduction in the size of the plaintiff’s workforce in its accounting business.[38] He also referred to current negotiations pursuant to which the plaintiff is seeking to purchase another accounting business worth approximately $2 million.[39] He submitted that this transaction would be placed in jeopardy if Mr Goldstein is able to solicit clients at will.[40]
[37]Transcript of Proceedings, Freedom Finance Accounting Pty Ltd v Goldstein (Supreme Court of Victoria, S CI 2017 00906, McDonald J, 23 March 2017) T14 LL9–24.
[38]Plaintiff’s Outline of Submissions dated 23 March 2017, [6.3].
[39]Ibid [6.4].
[40]Ibid.
The submissions set out above must be weighed against the following matters. First, Mr Rake deposed to negotiations with Mr Goldstein between October 2016 and February 2017 which, if concluded, would have seen Mr Goldstein acquire a client list that was of approximate value to Mr Goldstein’s 17.5 per cent equity in the plaintiff.[41] Mr Rake deposes that:
The plaintiff was happy, subject to an agreement between the parties, for the first defendant to take clients to the value of his equity in the Company.[42]
[41]Affidavit of Daniel Rake sworn 15 March 2017, [35].
[42]Ibid.
The matters deposed to by Mr Rake highlight the fact that the present case stands in stark contrast to facts which generally underpin claims for equitable relief for breach of a restraint of trade provision. In the present case, the parties were openly discussing both the prospect of Mr Goldstein terminating his employment and taking clients with him, albeit in return for the value of his equity. Second, there is very little evidence before the Court of actual loss of clients since Mr Goldstein terminated his employment on 28 February 2017. Third, there is a liquidated damages clause in cl 16.5(f) of the Agreement which prescribes the mode of assessing the plaintiff’s loss in the event that Mr Goldstein is found to have breached cl 16.[43] In this regard, it is to be noted that Mr Rake has deposed to the value of the revenue generated by the clients serviced by the plaintiff. The plaintiff does not point to any difficulty in assessing damages as a reason why the injunction it seeks should be granted.
[43]See Ibid “DR-1”, 19.
As against the matters relied upon by the defendant on the balance of convenience, Mr Goldstein is a 67 year-old man with a dependant wife and an 11 year-old child. He has recently commenced work as a consultant with a small accounting firm in Prahran. Having regard to my assessment of the plaintiff’s poor prospect of establishing the validity of the restraints in cl 16.1, I do not consider it appropriate to impose any restriction upon his capacity to provide services to the plaintiff’s clients.
The draft order handed up in Court by Mr Mahendra on 23 March 2017 sought orders, including:
·Requiring Mr Goldstein to deliver up computers and electronic devices currently in his possession;
·Provision of user names, passwords and codes required to access the devices delivered up by Mr Goldstein;
·Orders facilitating access to the devices by the plaintiff’s nominated forensic IT expert;
·Orders that the plaintiff provide the Court with a list of all his user names, passwords and codes required to access any email account, discrete server, Cloud server or like facilities;
·Orders for meeting the plaintiff’s IT expert to be given access to Mr Goldstein’s email accounts, discrete servers, Cloud server or like facilities.[44]
[44]Proposed order of the Plaintiff dated 23 March 2017, [4]-[6], [17]-[18].
The orders sought by the plaintiff on 23 March 2017 go well beyond the terms of any orders foreshadowed in the plaintiff’s summons dated 15 March 2017. Mr Mahendra submitted that the orders fell within paragraph 3 of the summons,[45] which foreshadowed that the plaintiff would seek orders:
Within 2 business days the first defendant deliver up to the plaintiff any confidential information he has belonging to the plaintiff in his possession.[46]
[45]Transcript of Proceedings, Freedom Finances Accounting Pty Ltd v Goldstein (Supreme Court of Victoria, S CI 2017 00906, McDonald J, 23 March 2017) T33 LL13-23.
[46]Plaintiff’s summons dated 15 March 2017, [3].
I do not accept Mr Mahendra’s submission that Mr Goldstein was placed on notice of the terms of the orders sought on 23 March 2017. Those proposed orders go well beyond the scope of the orders foreshadowed in paragraph 3 of the summons. Mr Goldstein was not provided with fair notice of the orders which would be sought by the plaintiff. This is in circumstances where the proceeding had previously been before the Court on 16 March 2017 and was adjourned. The plaintiff had ample opportunity to place Mr Goldstein on notice of the terms of the orders it would be seeking prior to the hearing on 23 March 2017. Considerations of fairness dictate that the plaintiff is not entitled to the relief which it now seeks.
Putting to one side considerations of fairness, the evidence before the Court falls well short of justifying the invasive orders sought by the plaintiff. Mr Goldstein gave two weeks’ notice of his intention to resign from his employment with the plaintiff with effect from 28 February 2017. At the time he gave notice he made clear his intention to continue to provide accounting services to any former clients who wish to utilise his services. Thus, the plaintiff was squarely on notice from mid-February of Mr Goldstein’s intention to engage in behaviour which it now contends contravenes the covenants he entered into at the time of executing the Agreement. The plaintiff did not file a summons until 15 March 2017. When the matter came on for hearing on 16 March 2017, it was necessary for the Court to point out to Mr Mahendra that the injunctive relief sought by the plaintiff could not possibly have been granted. The reason for this was that there was no material before the Court which actually identified the clients who were to be the subject of any restraining order.
Mr Goldstein has affirmed in an affidavit dated 21 March 2017, in which he deals with the allegations against him, that he has retained the plaintiff’s confidential information. He deposed as follows:
As stated in my affidavit above, due to the Plaintiff previously operating from the McKinnon office, I am still in possession of some of the Plaintiff’s confidential information. In addition, for several years prior to the sale, the Goldpats business had arranged for a computer back up to be automatically created each night at my house. That automatic back up ceased in July 2016 when the Plaintiff removed the server from the McKinnon office. The electronic image of the last back up remains on a hard drive in my possession. The hard drive also contains some of my personal information.
I am compiling the confidential material belonging to the Plaintiff which is still in my possession and my solicitors have informed the solicitors for the Plaintiff that this material will shortly be available for collection by the Plaintiff from the McKinnon office. Now produced and show to me marked TEG-1 is a copy of the letter from my solicitors dated 21 March 2017 to the solicitors for the Plaintiff.
Once collected, I will have no confidential information belonging to the Plaintiff in my possession, custody or control, other than that required for the purposes of this proceeding.[47]
[47]Affidavit of Theodore Edward Goldstein affirmed 21 March 2017, [45]-[47].
The letter from Mr Goldstein’s solicitors to the plaintiff’s solicitor referred to in paragraph 46 of Mr Goldstein’s affidavit was in the following terms:
Dear Ms Doyle,
We refer to the hearing before Justice McDonald on Thursday 16 March 2017.
We note His Honour’s comments with respect to the parties resolving any issues in relation to confidential information.
As your client would be aware, a number of client related files were left behind when your client moved the majority of the business from the McKinnon office. Further, there are files at the McKinnon office due to the fact that our client split his working week between the McKinnon and St Kilda Road offices.
Due to the volume of material remaining in the McKinnon office, our client is still in the process of boxing up that material and any other miscellaneous documents located by our client, but we are instructed that it will be available for collection from 9:00am on Thursday, 22 March 2017. It will comprise approximately 14 archive boxes. Please contact us to arrange collection.
We are also instructed that (as your client would be aware) the business previously arranged for a computer back up to be automatically created at our client’s house. That automatic back up ceased in July 2016. The electronic image of the last back up remains on a hard drive in our client’s possession. The hard drive also contains personal information of our client.
We propose the following options:
a)our client arranges for the back up to be copied to a new hard drive, and that hard drive is provided to your client; or
b)our client deletes the back up.
Please let us know which of those options your client prefers.
Finally, our client has, for the purpose of this proceeding, provided us with a copy of the proposed client list prepared as a result of the discussions between our client and Mr Rake. The original of this will be returned with the files referred to above.
Once the boxed material has been collected by your client, and the issue of the back up is resolved, we are instructed that our client will have no confidential information belonging to your client in his possession, custody or control other than material relevant to this proceeding.
Yours faithfully
KHQ Lawyers[48]
[48]Ibid “TED-1”.
I am satisfied that since the initial hearing on 16 March 2017, Mr Goldstein has undertaken genuine steps to address the concerns raised by the plaintiff regarding his retention of the plaintiff’s confidential information. As set out in his solicitor’s correspondence of 21 March 2017, he has set in train a process by which all of the plaintiff’s confidential information will be returned to the plaintiff.
On 23 March 2017 Mr Mahendra quite properly conceded that the key issue in respect of the plaintiff’s application for interlocutory relief was the enforceability of cl 16 of the Agreement.[49] I have come to a clear view that the plaintiff’s prospect of establishing at trial that the restraints contained in cl 16 are enforceable are poor. In these circumstances, the appropriate course is for the Court to make orders dismissing the plaintiff’s application by summons dated 15 March 2017. There will be an order that the plaintiff pay the first defendant’s costs on a standard basis, to be taxed in default of agreement.
---
[49]Transcript of Proceedings, Freedom Finances Accounting Pty Ltd v Goldstein (Supreme Court of Victoria, S CI 2017 00906, McDonald J, 23 March 2017) T2 LL17–19.
SCHEDULE OF PARTIES
| No. S CI 2017 00906 | |
| BETWEEN: | |
| FREEDOM FINANCE ACCOUNTING PTY LTD (ACN 600 717 100) | Plaintiff |
- and - | |
| THEODORE EDWARD GOLDSTEIN | First Defendant |
| ALDA AME | Second Defendant |
2
5
0