Hartleys Ltd v Martin
[2002] VSC 301
•7 August 2002
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
| AT MELBOURNE COMMERCIAL AND EQUITY DIVISION | |
| No. 6418 of 2002 | |
| HARTLEYS LIMITED | Plaintiff |
| (ABN 67 009 138 029) | |
| v | |
| PAUL MARTIN | First Defendant |
| - and - | |
| JARROD MARTIN | Second Defendant |
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| JUDGE: | GILLARD J. |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 23 July 2002 |
| DATE OF JUDGMENT: | 7 August 2002 |
| CASE MAY BE CITED AS: | Hartleys Limited v P. Martin and J. Martin |
| MEDIUM NEUTRAL CITATION: | [2002] VSC 301 |
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EMPLOYMENT CONTRACT – Notice to terminate – Failure to give period – Negative covenant not to work – Rescission – Injunction to require employee to not work refused – Restrictive covenant post employment for three months – Interlocutory injunction – Plaintiff seeking whole relief.
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| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr W. Houghton Q.C. with | Freehills |
| Ms F. O’Brien | ||
| For the First and Second | Mr C. Maxwell Q.C. with | Blake Dawson Waldron |
| Defendants | Mr C. Salpic |
TABLE OF CONTENTS
Parties ...................................................................................................................................................2
Purported Termination .....................................................................................................................2
The Proceeding ...................................................................................................................................3
Interlocutory Injunction ...................................................................................................................4
One Month’s Notice.........................................................................................................................10
Restrictive Covenant........................................................................................................................14
The Facts Establish the Interest.....................................................................................................24
HIS HONOUR:
The return of a summons filed in a proceeding instituted by writ, by the plaintiff seeking interlocutory injunctions restraining the defendants from breaching their contracts of employment.
Parties
The plaintiff, Hartleys Limited (“the plaintiff”), carries on the business of stockbroking and financial and investment advice.
The first defendant, Paul Martin (“Paul Martin”), commenced employment with the plaintiff on 5 October 1998 and by July 2002, was employed as a senior investment adviser.
The second defendant, Jarrod Martin (“Jarrod Martin”), was employed by the plaintiff from December 1999 and in July 2002, was an investment adviser.
The defendants are brothers.
During their employment with the plaintiff, they were permitted to conduct their advisory and investment services in a form of partnership, namely, sharing clients and remuneration.
It will be necessary to describe in some detail the nature of the plaintiff’s business and the employment of the defendants.
Each of the defendants was employed pursuant to a written contract of employment which contained express terms concerning notice of termination and restraint of each of them for a period of three months after their employment ceased from performing services for any of the clients of the plaintiff for whom they had performed services and enticing any key employee of the plaintiff to leave.
Purported Termination
On 15 July 2002, at about 10.00 am, the defendants called a meeting with Mr Neil Sutcliffe, the Victorian State Manager of the plaintiff. Paul Martin informed Mr Sutcliffe that they had reached a decision and were resigning effective from that date. He handed two letters of resignation to Mr Sutcliffe which, omitting the formal parts, stated – “I write to provide notice of my resignation from 15 July 2002 effectively (sic) immediately.”
They also stated in that letter that they were proposing to send letters to the clients to inform them of the defendants’ resignation and employment by another investment company.
It emerged in the course of the meeting that the defendants were to commence employment with ABN AMRO Morgan which is a large retail broking firm and a competitor of the plaintiff. Its Melbourne office is located two floors above the plaintiff’s premises at 367 Collins Street, Melbourne.
An employee of the plaintiff, Ms Margot Briggs, was a personal assistant to the defendants. She had knowledge of their managed funds, their administrative arrangements for managing the funds and knowledge of and contact with the plaintiff’s clients handled by the defendants. She gave one month’s notice on 15 July 2002.
After some discussion, the defendants left the premises and commenced their new employment. Ms Briggs followed soon thereafter and also commenced employment with ABN AMRO Morgan.
The Proceeding
On Wednesday 17 July 2002, the plaintiff issued a writ against the defendants and made application for an interim injunction to restrain the defendants from breaching the terms of their contract of employment. The defendants were informed of the application and Mr Salpic of Counsel was briefed to appear for them and was in attendance. I granted an interim injunction restraining the defendants from working for ABN AMRO Morgan and adjourned the summons for an interlocutory injunction until 23 July 2002.
The plaintiff’s case is simply stated. Both defendants entered into a contract of employment. It was an express term that their employment may be terminated at any time by either party giving one month’s notice in writing to the other. The defendants did not give one month’s notice. They indicated unequivocally that they were leaving immediately after giving notice.
It was an express term of the contract that whilst they were employed by the plaintiff, they were not to be engaged, concerned or interested in any other business without the prior written consent of the plaintiff. It was this term which I relied on as the basis for the interim injunction.
In addition, there was an express restrictive covenant in their contract of employment which, in effect, precluded the defendants for a period of three months after termination of their employment, from performing services for clients with whom they had had direct dealings in the 12 months’ period prior to the termination of their employment. There was a further express covenant that they each not entice key employees to terminate his or her employment. The plaintiff asserts that there is evidence that they have breached the covenants since Monday 15 July 2002 and they ought to be restrained from breaching them.
At the conclusion of the hearing of the summons seeking interlocutory injunctions, I informed the parties that I was not persuaded that the plaintiff was entitled to an injunction restraining the defendants from working in any other business and was not prepared to extend the injunction beyond the one granted on 17 July 2002. I stated that I would give my reasons later.
Interlocutory Injunction
The plaintiff seeks interlocutory injunctions restraining the defendants from working for any other organisation until their contract of employment has been validly terminated and for a month thereafter, and from breaching the restrictive covenants.
The principles which guide a court on an application for an interlocutory injunction are well established.
The Court has an inherent jurisdiction to grant an injunction. The jurisdiction is now the subject of statute. Section 37(1) of the Supreme Court Act 1986 provides –
“The Court may by order, whether interlocutory or final, grant an
injunction or appoint a receiver if it is just and convenient to do so.”
Sub-section (2) enables the Court to make an order subject to terms and conditions.
The jurisdiction is indeed a wide one. It requires the Court to be satisfied of two matters, namely, that it is just, and convenient, to grant an order.
An interlocutory injunction is merely provisional in its nature and does not conclude or determine any rights. Its object is to preserve the position which is in dispute in statu quo until the hearing and determination of the dispute or further order. The Court does not in general seek to anticipate the determination of the right but merely gives its opinion as to whether or not there is a serious issue to be determined and if a case has been made out, for the preservation of the right which has been breached or threatened.
The Court considers four general issues.
First, it is necessary for the party seeking the injunction to establish that he has a right which is recognised as legal or equitable and there is an infringement or threatened infringement of that right by some unlawful act.
In The Siskina [1979] AC 210 at 256, Lord Diplock stated –
“A right to obtain an interlocutory injunction is not a cause of action. It cannot stand on its own. It is dependent on there being a pre-existing cause of action against the defendant arising out of an invasion, actual or threatened, by him of a legal or equitable right of the plaintiff for the enforcement of which the defendant is amenable to the jurisdiction of the Court. The right to obtain an interlocutory injunction is merely ancillary and incidental to the pre-existing cause of action.”
But as Lord Woolf MR said in Broadmoor Special Health Authority v Robinson (2000) 2 All ER 727 at 732, that valuable dicta has to be applied with a degree of caution. His Lordship said –
“It is far from being an exhaustive statement of the extent of the Court’s powers to grant an injunction or as a guide as to who is entitled to bring proceedings to claim an injunction.”
His Lordship quoted with approval the statement of principle in Spry Equitable Remedies, 5th ed at p.323. The learned author observed –
“The powers of courts with equitable jurisdiction to grant injunctions are, subject to any relevant statutory restrictions, unlimited. Injunctions are granted only when to do so accords with equitable principles, but this restriction involves, not a defect of powers, but an adoption of doctrines and practices that change in their application from time to time.”
His Lordship concluded that he agreed with what Lord Cooke said in TV3 Network Ltd v Everready New Zealand Ltd [1993] 3 NZLR 435 at 438 when his Lordship stated –
“The remedy of injunction should be available whenever required by
justice.”
The second matter that has to be considered is the question whether there is a serious or substantial question to be decided, or, depending on the particular circumstances, whether the plaintiff has established something more than a serious or substantial question to be decided. The general rule was stated by the House of Lords in American Cyanamide Co v Ethicon Ltd [1975[ AC 396. The House of Lords held that in the great majority of cases involving an application for interlocutory injunction, all the plaintiff had to prove was that there was a serious or substantial question to be decided. That is the established view now in Australia. See The Australian Coarse Grain Pool Pty Ltd v The Barley Marketing Board of Queensland (1982) 57 ALJR 425, Murphy v Lush (1986) 60 ALJR 523, and Re Minister for Immigration ex parte Fejzullahu (2000) 74 ALJR 830 at 832.
However, there are exceptions to the general rule, and depending upon the circumstances, a party claiming an interlocutory injunction may have to establish something more than the fact that there is a serious question to be tried in the principal proceeding. By way of example, where a party seeks a mandatory interlocutory injunction or seeks, in effect, final relief at the interlocutory stage.
In the present application, the plaintiff is in effect seeking two injunctions, one to last approximately one month and the other to last approximately three months. The practical result of either injunction being granted would be that the plaintiff would obtain the whole of its relief, because by the time the proceeding was ready to go to trial, the periods would have expired. In those circumstances, the Court is bound to consider something more than a serious question to be decided.
Where the most likely outcome is, that if the granting of relief on an interlocutory application will have the practical effect of putting an end to the proceeding because the plaintiff will obtain all that he seeks, then the general rule is that the Court should consider the likelihood of the plaintiff succeeding in his proceeding.
In NWL Ltd v Woods [1979] 1 WLR 1294 at 1306, Lord Diplock considered the question. His Lordship said –
“My Lords, when properly understood, there is in my view nothing in the decision of this House in American Cyanamide Co v Ethicon Ltd to suggest that in considering whether or not to grant an interlocutory injunction the judge ought not to give full weight to all the practical realities of the situation to which the injunction will apply. American Cyanamide Co v Ethicon Ltd which enjoins the judge upon an application for an interlocutory injunction to direct his attention to the balance of convenience as soon as he has satisfied himself there is a serious question to be tried, was not dealing with the case in which the grant or refusal of an injunction at that stage would, in effect, dispose of the action finally in favour of whichever party was successful in the application because there would be nothing left on which it was in the unsuccessful party’s interest to proceed to trial. … “
His Lordship went on to say, at p.1307 –
“Where, however, the grant or refusal of the interlocutory injunction will have the practical effect of putting an end to the action because the harm that will have been already caused to the losing party by its grant or its refusal is complete and of a kind for which money cannot constitute any worthwhile recompense, the degree of likelihood that the plaintiff would have succeeded in establishing his right to an injunction if the action had gone to trial, is a factor to be brought into the balance by the judge in weighing the risks that injustice may result from his deciding the application one way rather than the other.”
(Emphasis added).
His Lordship did not state what degree of success the plaintiff must establish in order to obtain an interlocutory injunction. In Cayne v Global Natural Resources Pty Ltd [1984] 1 All ER 225, the Court of Appeal attempted to answer that question and a consideration of the judgments of the three judges, leads to the conclusion that as a general proposition, a defendant should not be denied his right to a trial if the defendant has put forward an arguable case raising a triable issue and that the plaintiff’s case is not strong. See at pp.233, 236 and 238. But nevertheless, it may be that the balance of convenience is so overwhelming that it tilts the balance in favour of one party.
The issue was more recently discussed by the Court of Appeal in Douglas v Hello! Ltd [2001] QB 967 at 982-83. Brook LJ, at p.983, referred to “a very strong likelihood that the claimant will establish … justification … at trial this will represent a powerful reason why the Court should exercise its discretion to grant an interim injunction to restrain publication.” That case was concerned with the publication of photographs in a magazine following a high profile marriage and the topicality of the subject matter was apparent.
In my opinion, the plaintiff has to establish in the present matter that there is a degree of likelihood, that it will be successful at trial in obtaining a permanent injunction against the defendants.
It would appear that Lord Diplock was stating that the matter of success was to be considered at the balance of convenience stage but, in my view, it is more practical to consider it on the issue of serious question to be decided – see Lord Scarman in N.W. Ltd v Woods, supra, at p.1315.
The third matter that has to be addressed is the balance of convenience which requires the plaintiff establishing that damages would not be an adequate remedy and if the injunction was refused, he would suffer a greater injury than a defendant would suffer, if the injunction was granted.
The final matter concerns the discretionary factors that may be applicable to a particular case. For example, delay causing prejudice or a failure by the plaintiff to disclose all relevant matters to the Court.
Whatever test the plaintiff has to satisfy, the question of the balance of convenience assumes importance and it has been recognised that if the Court was of the view that the issue to be decided showed a weak plaintiff’s case, the strength of his case on the balance of convenience may tilt the balance in favour of granting the relief. I refer to what Sir George Lush said in Slater Walker Superannuation Pty Ltd v Great Boulder Gold Mines Ltd [1979] VR 107 at 110, quoted with approval by the Full Court in Magna Alloys and Research Pty Ltd v Coffey [1981] VR 23 at 28.
Most applications, and this is no exception, are heard on affidavit material untested in any way. The Court is not in a position to resolve disputed questions of fact and often, time constraints make it difficult for the Court to resolve conflicts and difficult questions of law. But that is not to say that the Court should not, where possible, make an attempt to form some view of the strength of the applicant’s case and in the present case, because the plaintiff is seeking in effect the whole relief by its application, the Court should make an attempt to form a view of the strength of its case. Having said that, it is not an invitation to the Court to speculate.
In Series Five Software Ltd v Clarke [1996] 1 All ER 853, Laddie J held that a court was not precluded from considering the strength of the parties’ cases on an application for interlocutory relief, but should not attempt to resolve difficult issues of fact or law and express a view as to the strength of the respective cases unless it is apparent from the affidavit evidence and exhibits that one party’s case was much stronger than the other. It is a trite observation to make that each case must depend upon its own circumstances and that the ultimate question for the Court is whether it is just and convenient to grant an injunction. That involves a consideration of the justice of the situation, that is, justice to both parties.
The Court should endeavour to do its best to make some assessment of the case but bearing in mind that the material often is inadequate, incomplete and has not been tested.
It is necessary to consider separately the applications for the three injunctions.
One Month’s Notice
Each defendant entered into his own contract of employment with the plaintiff. For present purposes they are in identical terms and it is convenient to deal with the contract of employment of the first defendant, Paul Martin. The contract is in the form of a letter dated 5 October 1998 and it was signed by Paul Martin on that date.
The letter is divided by headings and on p.4 is the heading – “Termination of Employment”.
The first dot point provides –
“• Following your probationary period, your employment may be terminated at any time by either party by giving one month’s notice in writing to the other. If you are over 45 years of age with two or more years’ continuous service, five weeks notice will be given by HPL.”
There were other terms concerning the termination. Relevantly they provided –
“• HPL may pay you in lieu of all or part of the notice period. • If you terminate this agreement, without giving the notice required under this clause, you will forfeit salary and other entitlements for the balance of the notice period.”
The plaintiff seeks to enforce that requirement of one month’s notice by an injunction and in so doing, relies upon another term of the agreement which provided –
“•
Whilst employed by HPL, you must not be engaged, concerned or interested in any other business without the prior written consent of the Chief Executive Officer of HPL.”
“HPL” is the plaintiff.
The argument put forward by the plaintiff was that the defendants breached their contract of employment by failing to give one month’s notice and accordingly, the notice to bring the contract of employment to an end was ineffective and the contract is still in existence. In other words, although the defendants repudiated the agreement, it is the contention of the plaintiff that it did not accept that repudiation and rescind the agreement. It follows, according to the plaintiff, that it is entitled to restrain the defendants pursuant to the negative covenant prohibiting them whilst employed by the plaintiff from being involved in any other business. In support of that submission, the plaintiffs relied on the football cases of Hawthorn Football Club Ltd v Harding [1988] VR 49 and Buckenara v Hawthorn Football Club Ltd [1988] VR 39.
If the Court was to grant an injunction restraining the defendants, the period of the restraint would be something in the order of one month and as I have already stated, the practical result would be, if granted, that the termination would not be a live issue at a subsequent trial. Accordingly, the plaintiff has to prove some likelihood of success at trial that it would obtain an order to enforce this provision.
Mr C. Maxwell Q.C. of Counsel, who appeared with Mr C. Salpic of Counsel, submitted that the evidence clearly established that the contract was brought to an end on Monday 15 July 2002 by the plaintiff accepting the termination. Alternatively, he submitted that the contract contemplated that if one month’s notice was not given, certain consequences were to flow but not the continuation of the employment. Finally, he submitted that on any view, damages would be an adequate remedy and the balance of convenience was in favour of the defendants because the effect would be to stop them working, resulting in a loss of income.
The Court has two affidavit versions of the termination, although it must be said, that in the main, the affidavits substantially agreed as to what was said at the time. The thrust of the affidavit sworn on behalf of the plaintiff by Mr Neil Sutcliffe, the State Manager, was that he informed the defendants that they could be required to not work for a month, whereas Mr Paul Martin, supported by his brother Jarrod, said that Mr Sutcliffe said, during the course of the discussion when the parties were discussing the clients – “If you can look me in the eye and give me your word on that, then we will not initiate action to apply gardening leave”. The reference to “gardening leave” is an expression used in the industry. That is, an employee is required to not work for a period of time and is paid for that period. He or she cannot work elsewhere during the period of the notice. In an affidavit in reply to that statement, Mr Sutcliffe stated that what was said was not correct. He went on to say – “I did not say that Hartleys would not initiate action to apply garden leave. I said words to the effect that:
“If you look me in the eye and give me your word on that, then so be
it.”
The Court would have to be satisfied that the plaintiffs would have some prospect of success in establishing that the contract of employment was not brought to an end on Monday 15 July, that it continued and does so to the present. That is, the plaintiff did not elect to bring it to an end.
There are a number of facts which in my view militate against that conclusion and point to the fact that the plaintiff did accept the repudiation of the contract and rescinded it.
First, Mr Sutcliffe, even though to some extent caught by surprise by the sudden resignation, said words to the effect that they should leave immediately and then required them to hand over their security cards.
In the course of the discussion, the parties did advert to what was to happen to the clients and then the defendants posed the question, “Where do we go from here?” and Mr Sutcliffe said words to the effect, “If you’re going to go, then you leave immediately.”
This was said in a context which showed that Mr Sutcliffe had in his mind, at the time, the right to hold them to the period of notice and require them to perform “garden leave”.
Secondly, and more importantly, the solicitors acting for the plaintiff wrote a letter the following day to the defendants and the clear import of the letter was that the contract of employment had been terminated. Whilst the letter made mention of the failure to give four weeks’ notice, the letter focused on questions of confidentiality and the restrictive covenants. They were reminded not to perform services of a broking or investment advisory nature which paraphrased the restrictive covenant. The letter then provided –
“Furthermore, as a former employee of Hartleys you have an ongoing obligation of confidentiality to Hartleys at common law and continuing statutory obligations in respect of confidential information pursuant to the Corporations Law.”
(Emphasis added).
The letter concluded by reminding them of the importance of the restrictive covenants and indicating that the plaintiff may institute proceedings seeking injunctions to restrain them from breaching the restrictive covenants.
It is noted that the restrictive covenants only operate after the employment was terminated.
It is well established that an innocent party to a breach of a contract by the other party, has the election, assuming that the breach goes to the root of the contract, to either accept the repudiation and rescind the contract or affirm the contract and keep it on foot. Whether or not a party has elected is a question of fact and it is necessary to show that the party has unequivocally elected one way or the other.
The plaintiff brings the proceeding, it carries the burden of establishing that it did not bring the contract to an end, and in my view, there is ample evidence to raise considerable doubts that the plaintiff would be likely to succeed in proving that the contract was still on foot after 15 July 2002.
But in any event, I am satisfied that to grant an injunction would cause greater harm and damage to the defendants than the refusal of an injunction would to the plaintiff.
By 15 July 2002, each of the defendants was employed on a commission basis. Although they were still PAYE employees, they derived their income from commissions, paid for their own annual leave and sickness, and also their own superannuation. They had a list of clients who they provided broking and investment services for, but if they did not work, they would not be entitled to any remuneration. In order to meet this, Mr Houghton Q.C. who appeared with Ms O’Brien of Counsel for the plaintiff, offered to pay an average sum of money whilst the defendants were required to mark time on what is described as “garden leave”. Whilst I note that offer, in my view, if the plaintiff suffers any injury as a result of the failure to give notice, the quantum of damages could be readily ascertained and most likely would be of a minimal nature. Further, the contract itself provided for what was to happen in the event the proper notice was not given and proceeded on the basis that the employment was terminated. The parties contemplated what was to happen in that event.
The defendants should not be deprived of their opportunities to work elsewhere with possible greater loss than the offer of the plaintiff.
In my view, the plaintiff is not entitled to an interlocutory injunction to restrain either defendant from working for a period of one month.
Restrictive Covenant
Each contract contained the following restrictive covenants.
“HPL has invested a substantial amount of time and effort to develop business relationships with its Clients. To protect HPL’s goodwill, you agree that you will not (directly or indirectly) for a period of three months after the termination (including resignation) of your employment, on your own account or for any other person, firm, company or business:
(1)
perform the services of a broking or investment advisory nature for any Client without the prior written consent of HPL; or
(2) solicit, entice away, interfere with or endeavour to solicit,
entice away or interfere with any Client; or(3)
employ, engage, solicit or entice away or endeavour to employ, engage, solicit or entice away from HPL any Key Employee of HPL.”
The words “Client” and “Key Employee” are defined.
“’Client’ for the purpose of this clause means any person, firm, corporation or entity which was or is a client or customer of HPL (or any associated company of HPL) and with whom you have had direct dealings in the period of 12 months prior to the termination of your employment with HPL.”
The restrictive covenants went on to provide what was to happen in the event that some part of the clause was invalid. It provided –
“The preceding sub-clauses (1), (2) and (3) shall be construed and have effect as if they were a number of separate sub-clauses, with each sub-clause being separable from each other.
If any of the sub-clauses are invalid or unenforceable for any reason, such invalidity on enforceability shall not prejudice or affect the validity or enforceability of the other sub-clauses.”
It was the contention of the defendants that the restrictive covenants were invalid as being an unreasonable restraint of trade and their right of employment.
There are a number of principles of law which are well established.
It is convenient to first of all summarise the principles at common law in the absence of an express covenant restraining an employee, post-employment, from carrying out certain activities.
In the absence of any restrictive provision, when employees leave an employment, they are free to set up a directly competing business and, indeed, in the immediate locality. Further, employees are entitled to approach the former employer’s customers and seek orders from them. Further, they are entitled to use for their own purposes any information which they carried in their heads regarding the identity of the employer’s customers or contacts, or indeed the nature of the employer’s product requirements. In addition, they are entitled to use the information concerning pricing policies provided the information was acquired honestly in the ordinary course of their employment and they did not, for example, deliberately seek to memorise lists of names for the purpose of their own business.
What employees are not entitled to do is to steal any documents belonging to the employer, or to use, for their own purposes, information which is in fact confidential and which was ascertained in the course of the employment. Further, they are not entitled to copy any information onto scraps of paper and take them away for their own business.
The above is based upon the helpful summary of Sir Donald Nicholls V.-C. in Univeral Thermosensors Ltd v Hibbin [1992] 1 WLR 840 at 850.
They are the common law principles that apply and are to be contrasted with the situation where there is an express term of the contract of employment which binds the parties after the employment has ceased and which precludes the employee from carrying out certain activities. The general rule is, a contract is a contract is a contract, parties are bound by the terms and the terms should be enforced against them.
The point was well made as long ago as 1878 when Lord Cairns in Doherty v Allman (1878) 3 App Cas 709 at 720 said –
“If parties, for valuable consideration, with their eyes open, contracted a particular thing shall not be done, all that a court of equity has to do is to say, by way of injunction, that which the parties have already said by way of covenant, that the thing shall not be done; and in such case the injunction does nothing more than give the sanction of the process of the court to that which already is a contract between the parties. It is not then a question of the balance of convenience or inconvenience, or of the amount of damage or of injury – it is the specific performance, by the court, of that negative bargain which the parties have made, with their eyes open, between themselves.”
But when it comes to a contract between an employer and an employee which has the effect of restraining the employee freely using his services to his own benefit after the employment is ceased, the law has adopted an exception to the general rule.
It is in the public interest that a person is entitled to carry on his or her trade freely and any interferences with that right are in restraint of trade and if there is nothing more, contrary to public policy and void. The principles of law were stated by Lord MacNaughten in Nordenfelt v Maxim Nordenfelt Guns and Ammunitions Co Ltd [1894] AC 535 at 565.
It follows that a restraint of trade is presumed to be invalid. However, there are exceptions.
Hence, one commences with the proposition that a restraint of trade is void. The contract of employment does restrain the defendants from dealing with clients of the plaintiff for three months. That is a restraint of trade. The covenant is, prima facie, void. That throws the onus on the plaintiff employer seeking to enforce the restraint to show that the restriction is no wider than is reasonably necessary to protect its legitimate interests. “A restraint of trade is unreasonable if it is greater than is needed to give adequate protection to the person for whose benefit the restraint is imposed. It may be too great in the area which it covers or in the time through which it endures or in other respects.” Per Dixon CJ in Butt v Long (1953) 88 CLR 476 at 486.
A contract of employment containing a restrictive covenant is to be construed like any other contract.
“An agreement in restraint of trade, like every other agreement, is to be construed with reference to its subject matter and descriptive words may be restricted in their operation by reference to the circumstances in which the parties contract. But the agreement should be interpreted for the purpose of ascertaining its real meaning independently of the rules prescribing the tests of reasonableness for the purpose of ascertaining its validity. If an evident ambiguity appears from its text it may be proper to take into account the law relating to the validity of covenants in restraint of trade in resolving the ambiguity but a restrictive interpretation of general words is not to be adopted simply to save a covenant or agreement from invalidity.” Per Dixon CJ, ibid, at p.487.
The issue of reasonableness is to be determined at the date of the contract.
“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.” See Putsman v Taylor [1927] 1 KB 637 at 643.
That is not to say, that in certain circumstances, one may not look at later events insofar as they bear upon the circumstances existing at the relevant date.
“Moreover, I should add that although it appears to be settled that the validity of the restraint must be decided as at the date of the agreement, it would seem to me that facts that have occurred since that date would not necessarily be irrelevant; such facts might throw light on the circumstances existing at the relevant date and might, for example, absolve the court from the necessity of speculating as to the value of the consideration agreed to be furnished by the covenantee when, at the date of litigation, it might be possible to quantify that consideration exactly.”
Per Gibbs J in Amoco Australia Pty Ltd v Rocca Bros (1973) 133 CLR 288 at 318.
The onus rests upon the plaintiff employer in the present matter of proving special circumstances which justify the restraint.
“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, it 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 the other.”
(Emphasis added).
Per Lord Parker in Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 707.
It is well recognised that an employer is entitled to impose a restrictive covenant to reasonably protect his business against ex-employees taking customers with them to a business in competition with their former employer.
Although Latham CJ was in the dissent in the result in Linder v Murdock’s Garage (1950) 83 CLR 628, his statement of the principles is not in doubt and was expressly endorsed by Webb J in the same case at p.647. His Honour said at p.633 –
“Again, an employee who is brought into personal contact with the customers of his employer may by agreement effectively bind himself to abstain after his term of service has been completed from soliciting the customers of his former employer. In these cases the covenant in restraint of trade is not a covenant against mere competition but is a covenant directed to securing a reasonable protection of the business interest of the employer, and in the circumstances is not unjust to the employee. The interest which can validly be protected is the trade connection, the goodwill of the business of the employer.”
(Emphases added).
See also Herbert Morris Ltd v Saxelby, supra, at pp.702 and 709.
At the latter citation, Lord Parker said –
“Wherever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilise information confidentially obtained.”
(Emphasis added).
The task of the Court was described by Latham CJ in Linder’s case, supra, at p.635 as –
“To ascertain with due particularity the nature of the master’s business
and of the servant’s employment therein.”
In the same case, Fullagar J, at p.649, emphasised that it was necessary to consider and determine the nature of the interest “which the employer has and which he may legitimately seek to protect”. Kitto J, in the same case, at p.653, said –
“In these circumstances it is necessary to consider what it was for which, and what it was against which, the respondents needed protection: Herbert Morris v Saxelby. 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.”
(Emphasis added).
His Honour went on to say –
“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 customers, their peculiarities, their credit and so forth.”
In considering the facts in the present case, it is necessary to emphasise that I am dealing with an application for an interlocutory injunction. The affidavit material is untested and is put forward by deponents who have an interest in placing facts before the Court which assist one side’s case and to destroy the other side’s case. All of the deponents other than Mr Sutcliffe were not cross-examined on the affidavits. Affidavits were sworn by Mr Sutcliffe, the defendants, Mr Biggs and Stephen Campbell Macaw, the Victorian Director of Finance with ABN AMRO Morgans.
Mr Sutcliffe was cross-examined but mainly in relation to the means of establishing a group of clients, the fact that the investment advisers were mainly responsible for establishing a client base and that a group of clients had some proprietary benefit to the adviser who could derive a financial benefit by transferring the client to another adviser within the plaintiff organisation. But in considering much of his evidence, it must be steadily borne in mind that the reasonableness of the restraint must be adjudged at the date of the contract. The fact that, at present, the plaintiff is considering a policy which would give a financial value to an employee investment adviser in his group of employees, is irrelevant. That was not contemplated at the date of the contracts.
The Court has to be satisfied that there is a serious question to be decided, but bearing in mind that the effect of any interlocutory injunction would be to give the plaintiff the whole of its relief in respect to the restrictive covenant, the Court must be satisfied that there is a degree of likelihood that the plaintiff employer would be successful at trial and obtain permanent injunctions against the two former employees.
The history of the defendants’ employment and the nature and scope of the plaintiff’s business was given in affidavit by the manager of the plaintiff, Neil Sutcliffe.
The plaintiff is an Australian private client broking firm which provides investment advisory services to some 100,000 clients, including advice and trading on securities listed on the Australian Stock Exchange and other foreign exchanges and advice in respect to managed investments, superannuation funds, financial planning services and general investment. It has total client assets of more than $3 billion. It employs approximately 500 employees throughout Australia, including 170 investment advisers.
Investment advisers perform a variety of functions; some are mainly concerned with providing advice and trading on securities listed on the stock exchange and others provide detailed financial planning, including recommendations with respect to a range of diversified investments.
An investment adviser usually has a mix of clients. Some clients are introduced by the adviser and others are introduced through the plaintiff’s internal referrals. Once a client is dealt with by a particular adviser, that client usually remains within a portfolio of clients serviced by that adviser. The client is unlikely to move to another investment adviser unless there is some dissatisfaction or, after some discussion with the client, it is suggested and accepted that their needs would be better met by another adviser.
A successful investment adviser can have a number of clients well in excess of 500.
When Paul Martin commenced employment in November 1998, he had no practical experience in financial planning and had never worked in a stock broking situation before.
He is presently aged 30 years, is a qualified chartered accountant, experienced in financial planning, and has a degree and other qualifications in the area of accountancy, business administration and applied finance and investment.
He was employed by Ernst & Young, a large accountanting firm, in its business services division.
His brother, Jarrod, commenced employment in December 1999. He is presently aged 28 years, has a Bachelor of Business (Property) from RMIT University and has worked in the area of real estate until September 1997, when he commenced employment as an accountant, did a number of accounting units at Deakin University, and obtained a post-graduate Diploma in Financial Planning in June 1999. He became a financial planner at State Trustees Limited Financial Services Department and commenced employment with the plaintiff on 16 November 1999 as a trainee investment adviser.
Both defendants commenced employment as trainee investment advisers. Each was provided with a base salary for the first 12 months after which time each moved to a commission-type arrangement which applied to all investment advisers. The plaintiff paid the professional and attendance fees for educational conferences and sent each of them on a rookie programme for new investment advisers which comprised a ten day conference held at the plaintiff’s head office in Perth.
Paul Martin was authorised to give investment advice in 1999 and from October 1999, was paid solely on a commission basis.
The plaintiff provided the defendants with marketing opportunities, including assisting them to conduct seminars. The seminars were successful for both parties in that the defendants obtained new clients as did the plaintiff.
Jarrod Martin was engaged on a commission basis on 1 June 2001.
Both defendants built up a substantial client base whilst working with the plaintiff. From 1 June 2001, they worked in tandem, sharing clients and splitting commissions.
It is clear from the evidence that both defendants had a large client base whilst employed by the plaintiff. The plaintiff derived a revenue of approximately $40,000 per month from clients to whom the defendants provided services. In addition, the clients’ funds which were serviced by the defendants, amounted to some $38M and according to Mr Sutcliffe, it is the value of those ongoing funds under management which directly translates into increased share prices for the plaintiff’s shareholders.
In providing financial and investment advice to clients of the plaintiff, the defendants assumed a close working relationship with clients and, no doubt, the relationship was strengthened by the quality of the services provided by them. Mr Sutcliffe stated in his affidavit that by July 2002, the defendants were among the most successful of the plaintiff’s Melbourne office investment advisers, managing approximately $38M of funds, with a client list of over 500 accounts.
I am satisfied that the evidence leads to the conclusion that the plaintiff had a proprietary interest in its client base. It was justified in seeking to protect its business assets by contract against the real possibility of the risk that its employees who, having personal knowledge of and influence over clients acquired in the course of the employment as investment advisers, would leave the employment and take part of the plaintiff’s assets with them in the form of clients. The evidence of Mr Sutcliffe as to the present arrangements within the firm, giving some recognition to the value of a client base to an adviser, reinforces the position known at the date of the contract that a client base had a substantial value to the plaintiff and the advisers but in particular, the plaintiff’s business. The plaintiff had every right to seek to protect that business connection.
The question is, was the express covenant restraining the defendants from dealing with former clients a restraint which was reasonably necessary for the protection of the plaintiff’s business and not contrary to the public interest?
The reasonableness of a restrictive covenant is to be determined after considering three aspects, namely, the nature and extent of the activities which the employee is required not to indulge in, the area in which the activities must not occur and the duration.
Each case must depend upon its own particular circumstances. As Lord Parker said in Herbert Morris Ltd v Saxelby, supra, at p.707, the protection must afford no more than what is adequate in the circumstances.
Turning to the restrictive covenants, it is noted that the plaintiff has stated its interest which it seeks to protect, namely, that it had invested a substantial amount of time and effort to develop its business relationships with its clients and in order to protect that goodwill, required each defendant not to directly or indirectly, for a period of three months after termination, in effect, to perform services for, or deal with, clients. The restriction is on performing services, soliciting, enticing, interfering with or endeavouring to solicit, entice away or interfere with any client.
The consideration for these restraints is both significant and substantial. At the date of each contract, each defendant had very little experience in the investment advice field and were to be trained by the plaintiff, and given access to clients and the plaintiff’s organisation in order to build a client base for the mutual benefit of the parties.
The Facts Establish the Interest
It is noted that the period is for three months. The restrictive covenant is not confined to area. Hence, it would be Australia wide. The plaintiff carries on business in the five mainland States, and in my view, that area is not excessive or unreasonable. In considering that issue, the restriction is confined to those clients the defendants had contact with in the previous 12 months. Hence, it contains its own internal restriction. It is not any client. It is the client the defendants had some dealing with.
Further, the other investment adviser businesses and, in particular, the company to which each defendant went, also carry on business Australia wide.
In my view, the period of restraint and the area of potential restraint are not unreasonable in the circumstances. Three months, when viewed at the date of each contract, was reasonable to enable the plaintiff to take steps to protect its business assets in the form of its client base.
The word “client” is defined and it involves any client which was or is a client of the plaintiff “and with whom you have had direct dealings in the period of 12 months prior to the termination of your employment with (the plaintiff")”.
It is noted that the restriction is confined to any direct dealings by each of the defendant and the period is for 12 months. This provision defines the client. The business of investment advice is competitive and clients seek advisers who produce the best results.
Mr Maxwell Q.C., who appeared with Mr Salpic of Counsel for the defendants, submitted that the clause was unreasonable in the circumstances and went beyond what was necessary to protect the plaintiff’s business because it referred to former clients. It was submitted that that was too wide and was unreasonable. How could the plaintiff have a business interest in a former client? I am satisfied the investment advice business is competitive and clients have a choice. They will move if thought appropriate. There is always the possibility of a recent client returning to the plaintiff. In my opinion, it is not unreasonable in the circumstances to include any client of the plaintiff over the previous 12 months.
Mr Maxwell Q.C. also submitted that the area covered by the covenant was too wide in that it would cover clients in Tasmania where the plaintiff did not have an office. In my view, that submission has no substance. It is the client base which is to be protected. Where the client resides is not to the point. It is the fact that he is the client which is important to the business of the plaintiff and the plaintiff will provide the service from one of its established places of business. With respect to clients residing in Tasmania, this would most likely be the Melbourne office.
In my opinion, the covenants concerning clients are reasonable and it is not injurious to the public interest that the plaintiff should protects its business assets for a period of three months after termination of the employment.
It cannot be overlooked that it was the employment of the defendants by the plaintiff, their training, experience gained and access to clients that enabled the defendants to acquire a value in the investment field. Their value should not be at the expense of the plaintiff, who, mindful of it, contracted with them to restrict their activities which could adversely affect the plaintiff’s business interests for a relatively short period of time. It is also noted that on 17 July 2002, a large advertisement appeared on p.3 of “The Age” newspaper’s business section informing the world of the appointment of the defendants as Joint Heads, Financial Planning-Victoria of ABN AMRO Morgans.
No doubt this advertisement was aimed at attracting the clients for whom the defendants provided investment advice and strikes at the very core of the plaintiff’s business. The plaintiff had every right to protect its business by a reasonable covenant.
I have to be satisfied that there is a serious question to be decided and that the plaintiff would have some likelihood of success of obtaining a permanent injunction at trial. I am satisfied, in the circumstances, of both those matters. There is some evidence before the Court that the defendants have been approaching clients of the plaintiff. The risk is ever present. The advertisement supports that finding.
The final matter concerns the balance of convenience. I am very aware in considering this issue, that if I grant an injunction, in effect the plaintiff will obtain its total relief. However, I am persuaded that the balance of convenience does favour the plaintiff. It has a legitimate business interest to protect. In my view, the restrictive covenant goes no further than is necessary and that it was reasonable in the circumstances to protect that interest. The contract contains the express term and clearly, it has always been a matter of concern to the plaintiff to protect its interests and both parties accepted that was so, at the time when the contract was entered into. I do not accept that damages would be an appropriate remedy.
There is a real potential that damage will be done to the plaintiff’s business and goodwill and that it will be difficult to prove whether clients were in fact solicited, enticed away or interfered with and further, if clients do move to the new employer, whether the defendants were responsible or whether they were involved in providing broking or investment services. The potential to seek to indirectly provide services is always there. It is unlikely that any former client would be forthcoming in respect to those questions. There will be uncertainties as to reasons why clients may move. Even though it would be possible to refer to the income derived by the new employer with respect to that client, again there would be difficulties associated with proof as to the reasons why clients transferred their business. Further, in my view, there will be some difficulty in proving particular monetary loss.
The balance of convenience favours the plaintiff and, in my view, it is appropriate that an injunction should be granted.
Counsel for the defendants submitted that there was a discretionary factor that should be taken into account against the plaintiff. It was asserted that there was a lack of candour on behalf of Mr Sutcliffe in his affidavit. It was put that he grossly overstated the evidence concerning the soliciting of clients. I note the criticism, but in my view, I am not persuaded, that Mr Sutcliffe set out deliberately to mislead the Court and, in my view, the error he made, which was corrected by Simon Lopez, would not be a reason for refusing an interlocutory injunction.
The defendants’ counsel did not put any submissions that the Court should not make an order restraining the defendants from enticing away any key employee of the plaintiff. The evidence points to the defendants influencing Ms Briggs to leave the employment and it would appear to me arguable that she falls within the definition of a key employee. In the circumstances, it would be appropriate to grant an interlocutory injunction for the limited period of three months, restraining the defendants from seeking to employ, engage, solicit or entice away any key employee of the plaintiff. The inference is open that the defendants played some part in the decision of Ms Biggs changing employers.
Subject to any submissions by counsel, I propose to make the following order upon the usual undertaking being given by the plaintiff with respect to damages –
Until midnight on 15 October 2002 –
(a)
the defendants and each of them, be restrained from performing the services, directly or indirectly, of a broking or an investment advisory nature on their own account or for any other person, firm, company or business for any client of the plaintiff being those persons referred to in the annexure to this order and marked “A” without the prior written consent of the plaintiff;
(b)
That the defendants be restrained directly or indirectly from soliciting, enticing away, interfering with or endeavouring to solicit, entice away or interfere with those clients of the plaintiff referred to in the said annexure; and
(c)
That the defendants be restrained from employing, engaging, soliciting or enticing away or endeavouring to employ, engage, solicit or entice away from the plaintiff any key employee of the plaintiff being any person employed or engaged by the plaintiff who is involved in the management of the plaintiff or is an employee with client contacts.
I will hear the parties on the question of costs.
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