Moore Stephens Adelaide Pty Ltd v Wyka Consulting Pty Ltd (No 2)
[2014] SADC 154
•4 September 2014
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
MOORE STEPHENS ADELAIDE PTY LTD v WYKA CONSULTING PTY LTD & ANOR (NO 2)
[2014] SADC 154
Judgment of His Honour Judge Barrett
4 September 2014
TRADE AND COMMERCE - TRADE AND COMMERCE GENERALLY - RESTRAINT OF TRADE - RESTRAINT BY AGREEMENT - CONSTRUCTION OF AGREEMENTS IN RESTRAINT OF TRADE
In an agreement for the sale of an accountancy practice and a Service Agreement the parties agreed to Restraints upon the second defendant practising accountancy in the event of the agreements terminating.
Held: The terms of restraint were reasonable and enforceable. The question of final orders and costs be stood over pending an appeal to the Supreme Court.
Bankruptcy Act 1966 s 229(2)(c), referred to.
Hydron Pty Ltd v Harous (2005) SASC 176; McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, considered.
MOORE STEPHENS ADELAIDE PTY LTD v WYKA CONSULTING PTY LTD & ANOR (NO 2)
[2014] SADC 154
On 27 June 2014 I delivered a judgment in this matter relating to what I might describe as the principal dispute between the parties. The issue in that dispute was whether a clawback clause in a business sale agreement (“BSA”) entered into by the parties was enforceable against the second defendant, Mr Richmond. The BSA related to the sale by him of his accountancy practice to the plaintiff.
I found that the clawback clause was enforceable. I made an order entering judgment for the plaintiff against the second defendant in the sum of $327,773.
At the time of delivering judgment I did not know that, sometime beforehand, the second defendant had entered into a personal insolvency agreement. I was not told this until 4 August 2014 when the court reconvened for the purpose of hearing whether counsel for either party wished to make any further submissions on the question of what, if any, orders for restraint I should make. The question of costs was also going to be discussed.
Mr Britten-Jones for the plaintiff submitted on 4 August that, in the light of Mr Richmond entering into the personal insolvency agreement, s 229(2)(c) of the Bankruptcy Act 1966 prevented his client, as a creditor of the second defendant, from taking any fresh step in the proceedings. Mr Britten-Jones accepted that any attempt by his client to enter judgment for the sum I ordered would be proscribed by that section. Accordingly, he submitted that I should revoke the order I made on 27 June. Mr Elix for Mr Richmond agreed with that submission. Accordingly I revoked the order.
Mr Britten-Jones further submitted that I should proceed to make orders for restraint against Mr Richmond preventing or restricting him from carrying out accountancy work. He said that I had power to make such orders because they related to Mr Richmond personally and did not relate to the provable debt. Mr Elix did not dispute that I had power to make orders for restraint but he submitted that I should bear in mind the written and oral submissions Mr Jenner, as counsel, had already made to me in that regard in opposition to such orders.
I prepared a draft judgment on the restraint questions and forwarded it to the parties with a view to inviting brief submissions on the final orders I should make in the light of my findings about the restraints. The court convened on 4 September 2014 for that purpose and for the purpose of inviting submissions on costs.
For reasons I will now explain I have decided to stand over the questions of restraint and costs, but publish this judgment containing findings about aspects of the restraints.
The second defendant has lodged an appeal to the Supreme Court from my principal findings. There is an application before the Supreme Court to expedite the hearing of that appeal by the Full Court. Interlocutory orders of restraint have been made by his Honour Judge Brebner. Orders made on 21 February 2014 remain in force until further order. Thus, on an interim basis, the plaintiff’s position is preserved. On behalf of the second defendant, Mr Jenner submitted that it was preferable that the question of final orders of restraint be stood over to await the outcome of the appeal. Further, he submitted, that for practical reasons, it would also be preferable to stand over the question of costs. Mr Chau appeared for the plaintiff in lieu of Mr Britten-Jones who is overseas. He did not oppose the standing over of the restraint question but expressed reservations about doing so in respect of costs. Because I am told that there may need to be detailed submissions on the question of costs I have decided to stand over that matter as well until the disposition of the appeal.
I proceed now to make findings in respect of the restraints.
The plaintiff’s position
The plaintiff submits first that the parties agreed in the BSA on a range of acts which neither would commit within a range of dates from completion. I set out clauses 14, 15 and 16 of the BSA which deal respectively with non-competition, restraint of directors and key employees and injunction.
NON-COMPETITION
(a) Definitions
Prescribed Act means each act described in Clause 14(f);
Prescribed Area means each area described in Clause 14(g);
Prescribed Period means each period described in Clause 14(h).
(b) Separate Obligations
Clause (14(e) is intended to take effect as if each of the separate obligations which would result from combining each Prescribed Act with each Prescribed Period with each Prescribed Area were set out in full in that clause.
(c) Remaining Obligations Unaffected
If any obligations referred to in Clause 14(e) cannot be enforced, the enforceability of the other obligations will not be affected.
(d) Severance
Each separate obligation referred to in Clause 14(e) is severable from the other obligations but all the separate obligations will be cumulative in their effect despite any overlap between them.
(e) Promise not to Compete
In consideration of the Buyer entering this Agreement and in order to reasonably protect the goodwill of the Business:
(i)the seller will not; and
(ii)a Covenantor will not,
(either directly or indirectly) participate or be interested in the commission of each Prescribed Act within each Prescribed Area for each Prescribed Period.
(f) Prescribed Act
For the purposes of Clause 14(e) each of the following is a Prescribed Act:
(i)carrying on or assisting in the carrying on of (for example as a sole operator, partner, joint venturer, associate, consultant, employee, independent contractor, agent, director or officer of a body corporate, shareholder, unitholder, trustee, beneficiary) any business which may directly or substantially compete with the Business;
(ii)accepting from a person who was a customer of the Business before the Completion Date any business of the kind ordinarily forming part of the Business;
(iii)performing, discharging or otherwise attending to, or being involved in, for a person who was a customer of the business before the Completion Date, any business of the kind ordinarily forming part of the Business;
(iv)soliciting or accepting any request from a person who was a customer of the Business before Completion for the goods and/or services supplied by the Business; or
(v)enticing or attempting to entice any employee of the Business from continuing to be employed in the Business, on behalf of the Seller or any other person firm or company,
except as expressly permitted under the consultancy Agreement referred to Annexure F.
(g) Prescribed Area
For the purposes of Clause 14(e) each of the following is a Prescribed Area:
(i)the State of South Australia;
(ii)the metropolitan area of Adelaide; and
(iii)the area encompassed within a radius of 20 kilometres of the Premises; and
(iv)the area encompassed within a radius of 10 kilometres of the Premises.
(h) Prescribed Period
For the purposes of Clause 14(e) each of the following is a Prescribed Period:
(i)from Completion to 4 years after Completion;
(iii)from Completion to 3 years after Completion;
(iv)from Completion to 2 years after Completion; and
(v)from Completion to 1 years after Completion.
(i) Reasonableness
Each Party agrees that this Clause 14 only attempts to protect the business, reputation and goodwill of the Business and the Buyer’s legitimate interest in the Business as agreed under this Agreement. Each agrees that the terms of this Clause 14 are reasonable, have been negotiated and are fair given all of the circumstances.
(j) Survival
The provisions of this Clause 14 survive the termination or expiry or satisfaction of this Agreement.
15 RESTRAINT OF DIRECTORS AND KEY EMPLOYEES
(a) Persons Who May Be Restrained
(i)The Seller shall procure the execution of restraints by such of the following persons as the Buyer requires:
(A)the directors or principal shareholders of the Seller (if a company); and
(B)the spouse, child, or other relative of the Seller (if an individual) or of the Seller’s directors or principal shareholders (if the Seller is a company), where that person was employed in the Business within two years immediately preceding the date of this Agreement.
(ii)Within 14 days after the date of this Agreement the Buyer shall notify the Seller of those persons whom the Buyer requires to execute the restraint described in Clause 15(a)(i).
(b) Form of Restraints
The restraints shall be in a deed in the form of the restraints contained in Clause 14.
(c) Preparation and Execution
The Buyer will submit to the Seller within fourteen days after the date of this Agreement an engrossment of the deed, together with sufficient copies, all duly executed by the Buyer, in order that there shall be an executed copy of the deed available for the Seller, the Buyer, and for each of the persons referred to in the deed.
(d) Obligation on Completion
Completion of this sale is conditional upon the Seller:
(i)having procured the execution of the deed by each of the persons specified in Clause 15(a); and
(ii)handing over a fully executed copy of the deed to the Buyer on Completion.
(e) Copies of Persons Restrained
The Buyer agrees to furnish an executed copy of the deed to each person who shall have executed the deed, within seven days of completion.
16 INJUNCTION
The Seller acknowledged that:
(i)the remedy at law for breach of any of the obligations set out in Clause 14 and 15 would be inadequate; and
(ii)relief by way of injunction may be granted to enforce such obligations without the need to prove actual damage to the Buyer.
The plaintiff refers to Clause 14(j) which provides that the restraints will survive the “termination or expiry or satisfaction of the agreement”.
There are also restraints in the Service Agreement (“SA”) entered into between the parties. I reproduce Clauses 23 and 26.5 of the SA:
23 RESTRAINT
(a)Subject to paragraph (c) of this Clause, the Service Provider shall not during the Term either on its or his own account or in conjunction with or on behalf of any other person or persons (whether as principal, manager, employee, contractor, agent or otherwise), whether directly or indirectly carry on or be engaged, concerned or interested in any business which competes with the Principal as the same is (or has been at any time during the preceding 12 months before the Commencement Date) carried on by the Principal. The Service Provider may carry on any other business.
(b)Subject to paragraph (c) of this Clause, the Service Provider shall not during the Term and for the periods mentioned in paragraph (b)(victim) of this Clause below either on its or his own account or in conjunction with or on behalf of any other person or persons(whether as principal, manager, employee, contractor, agent or otherwise), whether directly or indirectly:
(i) solicit the custom or deal with (or endeavour to solicit the custom or deal with) any Client of the Principal;
(ii) solicit or entice away or endeavour to solicit or entice away from the Principal any person who is (or has been at any time during the preceding 12 months before the Commencement Date) employed (or otherwise contracted) by the Principal, whether or not such person would commit a breach of his or her contract of employment (or other contract) by reason of leaving service;
(iii)interfere or seek to interfere or take steps that may interfere with the continuance of supplies to the Principal(or the terms relating to those supplies) from any person supplying components, materials or services to the Principal; or
(iv)use, convey or otherwise employ any Intellectual Property or Confidential Information which was acquired by or in association with the Principal,
subject to paragraph (c) of this Clause in each case:
(v)in the areas of:
(A) Australia;
(B) The State;
(C) The capital city of the State;
(D) An area of 40 km from a site at which the Principal carries on business;
(E) An area of 20 km from a site at which the Principal carries on business; and
(vi)for the period from the Commencement Date until the later of:
(A) 3 years after the Termination Date;
(B) 2 years after the Termination Date;
(C) 12 months after the Termination Date;
(D) 9 months after the Termination Date;
(E) 6 months after the Termination Date;
(F) 3 months after the Termination Date.
(c)Each of the undertakings contained in paragraph (a) and (b) of this Clause is a separate undertaking by the Service Provider in relation to itself and its interests and shall be enforceable by the Principal separately and independently of its right to enforce any one or more of the other covenants contained in paragraph (a) or (b) of this Clause and in the event that any such undertaking shall be found to be void but would be valid if some part were deleted or the period or area of application were reduced, then such undertaking shall apply with such modification as may be necessary to make it valid and effective.
(d) The Service Provider, having obtained or had the reasonable opportunity to obtain independent legal and professional advice, acknowledges and agrees that the undertakings contained in paragraphs (a) and (b) of this Clause are no more extensive than is reasonable o protect the genuine commercial interests of the Principal.
(e)The Service Provider agrees that a breach by it of this Clause 23 would be unfair and calculated to damage the Principal’s business and that accordingly, the Principal will be entitled to injunctive relief to restrain a breach by the Service Provider of this Clause in addition to any other rights or remedies which the Principal by have.
26.5Survival
Clauses 4(b), 4(e), 5, 6, 9(f), 10(b), 11,12,13,14,15,16, 18, 19.2, 22, 23, 24, 25, and 26 survive the termination or expiry of this Agreement.
The plaintiff acknowledges that:
(1)restraints on trade are contrary to public policy and void unless they can be shown to be reasonable;
(2)in this context “reasonable” means that the restraint affords no more than adequate protection to the covenantee while at the same time not being injurious to the public interest.
(3)The party seeking to enforce the restraint has the onus of establishing reasonableness. The fact that parties have agreed the restraints are reasonable will not necessarily be conclusive.
The plaintiff nevertheless submits that in the case of vendor/purchaser restraints the covenantee has a right to protect that which he has purchased.
The plaintiff referred to the observations of Bleby J in Hydron Pty Ltd v Harous (2005) SASC 176 at [85]. His Honour said:
The courts in general take a stricter and less favourable view of the covenants in restraint of trade entered into between an employer and an employee than of such covenants entered into between a vendor and a purchaser. This is probably because there are different interests to protect. In the case of sale of a business, the purchaser is entitled to protect himself against competition on the part of the vendor, in order to observe, for a reasonable time, what it is that he has bought. With an employee, the emphasis is not so much on restriction of the activities for which the employee is trained and which might be competitive with those of the employer, but on the use of information obtained about the employer’s business which would be of subsequent use to the employee or to the employee’s new employer.
The plaintiff submits that the restraint was reasonable at the time of the execution of the BSA and the SA. The purchase price of the defendant’s business was $1.4 million. The second defendant had a longstanding relationship with some of his clients and it might be some time before the plaintiff could establish a relationship with the clients for whose business it had paid, or agreed to pay.
Defendant’s position
Mr Jenner made oral submissions at the conclusion of the trial about the restraints and also included that topic in his written submissions.[1] The defendant’s submissions were to the effect that, for a number of reasons, the restraints now sought by the plaintiff are either unenforceable or unreasonable. Those reasons are as follows:
[1] [50], [150]-[184].
The restraints in the BSA and SA do not survive the termination of those agreements.[2]
[2] [150]-[160].
Alternatively, if the restraints do survive the termination of the agreements, the court should decline to order an injunction. That discretionary equitable remedy should not be exercised in the plaintiff’s favour because the plaintiff has breached the agreements and does not come to the court with “clean hands”.[3]
[3] [161]-[164].
In the further alternative, the restraints in the agreements are either void for uncertainty or are not reasonable and should not be enforced.[4]
[4] [165]-[184].
I return to the assertion that the restraints do not survive the termination of the agreements. In my view, that submission is not sustainable. The second defendant seeks to argue that the agreement makes no provision for the termination of the agreement by the defendants. However the restraints are merely applied to dates from the termination date, in the case of the SA, and the completion in the case of the BSA. That is without reference to how that date comes to be fixed, ie whether by termination by one or other of the parties.
In any event, in each case the survival clause reiterates the agreement that the restraint will survive the termination, expiry or satisfaction of the agreement.[5]
[5] Section 14j of the BSA and section 26(5) of the SA.
The defendant submits in the alternative that if the restraints do survive the termination of the agreements the court should decline to order an injunction because the plaintiff has breached the agreement. I have, of course, found to the contrary. I have found that the second defendant breached the agreement. If I am wrong about that, I accept the plaintiff’s submission[6] that where the breach consists of the failure to pay interest, such a breach is not a fundamental one as would vitiate the agreement.[7]
[6] See Outline [50].
[7] McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-7.
The defendant’s further alternative submission is that the restraints are void for uncertainty or are unreasonable. In my view the restraints are not uncertain. Given the purchase price of the accountancy practice and the time it might take for the plaintiff to form relationships with the vendor’s long term clients, the terms are, in my view, not unreasonable.
Conclusion
For the reasons I have already set out I will stand over the question of what final orders for restraint should be made and the question of costs.
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