Ryan v Mason
[2012] NZHC 3105
•21 November 2012
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV 2011-419-000083 [2012] NZHC 3105
BETWEEN FREDERICK MICHAEL RYAN First Plaintiff
ANDFMML LIMITED Second Plaintiff
ANDSEAN DILLON MASON Defendant
Hearing: 30, 31 July; 1-3 August; 24 September 2012
Appearances: GHJ Brant and RJT Robertson for Plaintiffs
C T Gudsell QC and D Nielsen for Defendant
Judgment: 21 November 2012
(RESERVED) JUDGMENT OF ANDREWS J [As to liability]
This judgment is delivered by me on 21 November 2012 at 3pm pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
Solicitors/Counsel:
Stace Hammond : PO Box 19101, Hamilton 3244 DX GP20026
Nielsen Law : PO Box 1108, Hamilton 3240C T Gudsell QC : PO Box 19085, Hamilton 2001 DX GP20058
RYAN & ANOR V MASON HC HAM CIV 2011-419-000083 [21 November 2012]
Table of Contents
Para No Introduction ..........................................................................................................[1] Factual background .............................................................................................[4] The plaintiffs’ claims: introduction ..................................................................[28] Is the 22 July 2008 agreement binding?
Submissions ..........................................................................................................[32]
(a) Section 9 of the Property Law Act – is the 22 July 2008 agreement a valid deed? ...................................................................................................................[34] (b) Is the 22 July 2008 agreement valid and binding as a contract? ..............[41] The non-solicitation clause and geographical restraint of trade
Introduction ..........................................................................................................[49]
Restraint clauses: law ..........................................................................................[51]
Are the restraint clauses void for lack of consideration?
Submissions ..........................................................................................................[57]
Discussion ............................................................................................................[59]
Are the restraint clauses reasonable?
Submissions ..........................................................................................................[61]
Is the geographical restraint of trade reasonable? ..............................................[65] Is the non-solicitation clause reasonable? ...........................................................[78] Has Mr Mason breached the non-solicitation clause? ........................................[84] Has Mr Mason breached fiduciary duties owed to Mr Ryan and FMML? [101] A further alleged breach ..................................................................................[105] Result .................................................................................................................[109]
Introduction
[1] The first plaintiff, Mr Ryan, and the defendant, Mr Mason, are solicitors. Between 22 July 2008 and 17 December 2010, Mr Mason was in partnership with Mr Ryan in the firm Ryan Law, as a salaried partner employed by Ryan Law. On 10
January 2011, Mr Mason commenced practice in Morrinsville on his own account. [2] Mr Ryan claims against Mr Mason under three causes of action:1
(a) under the first cause of action, that Mr Mason is in breach of a
restraint of trade covenant which prevents his practising law within 20 kilometres of Morrinsville for a period of five years (“the geographical restraint of trade”);
(b)under the second cause of action, that Mr Mason is in breach of a non- solicitation covenant which prevents his soliciting clients of Ryan Law for a period of five years (“the non-solicitation clause”); and
(c) under the fourth cause of action, that Mr Mason is in breach of fiduciary duties of fidelity and confidence owed to both Mr Ryan and FMML Ltd.
[3] Mr Mason denies that he is liable to Mr Ryan or FMML Ltd, on any of the causes of action. This judgment is concerned with liability only. Counsel agreed that in the event that I uphold Mr Ryan’s claims, there will be a separate quantum hearing.
Factual background
[4] Mr Ryan has practised law in Te Aroha since 1977. He was in partnership
with his father from 1980 until his father’s death in 1989, and then in partnership
1 A fourth cause of action, in which it was alleged that Mr Mason had breached a non-solicitation clause in his employment agreement with the second plaintiff, was abandoned.
with his brother, Mr Peter Ryan, until 1995.2 At that time, the plaintiff and Peter Ryan separated the practice; the plaintiff continued to practise in Te Aroha as “Michael Ryan”, and Peter Ryan established a practice in Hamilton and Morrinsville as “Ryan Law”.
[5] Mr Mason was admitted as a barrister and solicitor in 2003 and was employed by Peter Ryan to work at the Morrinsville office of Ryan Law. Mr Mason’s employment agreement was with Ryan Consulting Ltd, a service company which provided Ryan Law with administrative services, including the employment of legal staff.
[6] In April 2007 Peter Ryan and the plaintiff merged their respective practices in Morrinsville and Te Aroha under the name Ryan Law. At that time, Mr Mason was largely servicing the clients of Peter Ryan’s Morrinsville practice, while Peter Ryan was servicing clients of the Hamilton office. During 2006, Peter Ryan and Mr Mason had discussions about Mr Mason being admitted to partnership. While those discussions did not go beyond a general discussion, Mr Mason completed the New Zealand Law Society (“the Law Society”) Trust Account Partner course in July 2006, and the Flying Start course in September 2006. On 1 June 2007, the plaintiff purchased Peter Ryan’s Morrinsville practice.
[7] Mr Mason remained working in Ryan Law, now owned by the plaintiff. His conditions of employment remained the same as when he was employed by Ryan Consulting Ltd, but no new contract of employment was completed with the second plaintiff (Mr Ryan’s service company, FMML Ltd). Mr Mason’s salary was, however, increased from $60,000 to $70,000 a year, to reflect Mr Mason’s responsibility for servicing Ryan Law’s Morrinsville clients. Initially, Mr Ryan spent two or three days a week working in the Morrinsville office.
[8] Mr Mason and Mr Ryan also discussed Mr Mason’s entry into partnership. Mr Mason’s salary was increased to $100,000 a year as from 4 December 2007. Mr Ryan’s evidence was that this was in conjunction with an agreement in principle
having then been reached between himself and Mr Mason, that Mr Mason would be
2 In this judgment, “Mr Ryan” refers to the first plaintiff, Mr Michael Ryan.
admitted into partnership. Mr Mason’s evidence was that the discussions as to partnership did not begin until January 2008, and that the agreement in principle was reached in late January or early February 2008. His evidence was also that the salary increase had nothing to do with the partnership agreement, but was to recognise the fact that Mr Ryan planned to spend less time at the Morrinsville office, and Mr Mason would be playing a bigger role.
[9] On 8 February 2008, Mr Mason forwarded an application to practise as a principal to the Law Society, and on 21 February 2008, Mr Ryan completed a certificate confirming Mr Mason’s fitness to practise on his own account. The application was approved on 16 March 2008.
[10] I am satisfied that the agreement in principle was reached in late January or early February 2008. This is for two reasons. The first is that Mr Mason was keen to be admitted as a partner, and would therefore have made his application to practise on his own account as soon as practicable after the agreement was reached. If agreement had been reached in early December 2007, he would have applied then; he would not have delayed until early February 2008. Secondly, as noted below, Mr Mason’s first draft of a partnership deed was prepared in February 2008. Again, Mr Mason would have been keen to draft the deed as quickly as he could. I accept Mr Mason’s evidence that he would have used the Christmas–New Year vacation to draft an agreement.
[11] Mr Ryan and Mr Mason were at some variance in their evidence as to the terms of the agreement in principle. Mr Ryan’s evidence was that Mr Mason would be admitted as a partner, but as a salaried (rather than equity) partner, that Mr Ryan would give Mr Mason an indemnity in respect of partnership liabilities, and that Mr Ryan’s two daughters (who were at that time studying law) would not be admitted to full partnership before Mr Mason. Mr Mason’s evidence was that it was agreed that he would become an equity partner in the firm, and would pay for his half share of the partnership on the second anniversary of the partnership. Until then, he was to be paid a salary and not share in the partnership profits, but would be indemnified against the partnership liabilities until he had paid his half share. Mr Mason
accepted that it was agreed that Mr Ryan’s daughters could, in due course, be admitted to partnership.
[12] It is not necessary to determine this point. That is because it is clear that there was no discussion, let alone agreement, of a geographical restraint of trade, or of a non-solicitation clause, when Mr Ryan and Mr Mason reached agreement in principle.
[13] By agreement, Mr Mason prepared the first draft of a deed of partnership. Mr Ryan gave him a copy of the partnership deed between himself and Peter Ryan to use as the basis for the draft, and Mr Mason provided Mr Ryan with a first draft on
29 February 2008. After receiving Mr Ryan’s comments on the draft, Mr Mason prepared a second draft, incorporating changes required by Mr Ryan, and provided it to Mr Ryan on about 8 April 2008. Again, Mr Mason received Mr Ryan’s comments and prepared a third draft, dated 23 April 2008, then a fourth draft, dated 23 June
2008. I accept Mr Mason’s evidence that he made all amendments to the drafts to incorporate changes requested by Mr Ryan.
[14] Mr Mason’s fourth draft was substantially different from the first draft. In particular, rather than providing for Mr Mason to be admitted as an equity partner with deferred payment of his half share, it provided for him to be admitted as a salaried partner. Further, the timing of his entry into partnership was not guaranteed, but the draft provided that if Mr Ryan were to admit any new partner, Mr Mason would be the first to be admitted. As a salaried partner, Mr Mason was to receive an annual salary of $100,000, with annual increases of not less than a Consumer Price Index (CPI) adjustment in accordance with a CPI adjustment formula attached in a schedule. After giving Mr Ryan the fourth draft, Mr Mason heard nothing further from Mr Ryan for some weeks.
[15] Mr Ryan accepted that Mr Mason prepared the “first two or three drafts”, but could not recall who prepared later drafts, including the fourth draft. I accept that Mr Mason prepared the first four drafts, that the first draft reflected the terms of the agreement in principle, as Mr Mason understood them to be, and that subsequent drafts accommodated changes Mr Ryan wanted.
[16] Mr Ryan produced a draft dated 26 June 2008, by copying Mr Mason’s fourth draft onto his computer and re-formatting it.3 He made no changes to the content of the draft. He prepared a further draft agreement (“Mr Ryan’s first draft”), dated 30
June 2008. This draft made two substantial changes to Mr Mason’s fourth draft: first, in providing that no new partner was to be admitted except contemporaneously with Mr Mason, and reserving the right to Mr Ryan to admit his daughters to partnership; and secondly, in inserting the non-solicitation clause. Mr Mason’s evidence was that he was not given Mr Ryan’s first draft at the time (and in fact not until October 2010).
[17] Mr Ryan prepared a further draft of the agreement on 18 July 2008 (“Mr Ryan’s second draft”), shortly before he was due to leave to spend some five to six weeks out of New Zealand. He signed two copies of the agreement before a witness, and arranged for these to be placed on Mr Mason’s desk. He telephoned Mr Mason late on 18 July 2008 and told Mr Mason he had signed, or would sign, the agreement, and that it would be left for Mr Mason to sign.
[18] Mr Mason signed Mr Ryan’s second draft of the agreement on 22 July 2008.4
He did so thinking it was substantially the same in content as his own fourth draft. He said he believed that Mr Ryan would have told him, when they spoke on 18 July, if there were significant changes.
[19] In fact, there were significant changes in the 22 July 2008 agreement. First, the clauses providing for the admission of new partners were deleted, thus deleting any provision for Mr Mason to be admitted as an equity partner, and any provision for the admission of Mr Ryan’s daughters to the partnership. Secondly, the geographical restraint of trade was added to the non-solicitation clause.
[20] Mr Mason signed the agreement without first reviewing it, so did not notice the changes before he signed it. He did not read through the agreement until a few days later. Immediately after signing the 22 July 2008 agreement, Mr Mason wrote
to the Law Society, advising that he was now a partner in Ryan Law as from that
3 The computer software used at the Te Aroha office was different from that used at the
Morrinsville office.
4 This document will be referred to as “the 22 July 2008 agreement”.
date. He also amended in-house letterhead precedents, on a case by case basis as they were used, to show him as a partner of Ryan Law.
[21] A few days later Mr Mason read through the agreement. His evidence was that he then realised, for the first time, that the provision that he would enter into equity partnership either before or contemporaneously with Mr Ryan’s daughters had been deleted, and that the non-solicitation clause and geographical restraint of trade had been added. He also realised that a formula set out in the agreement for calculating his salary was incorrect, to his own considerable advantage.
[22] Mr Mason was most concerned that the 22 July 2008 agreement did not reflect the terms he believed had earlier been agreed. He was angry, in particular, that Mr Ryan had inserted burdensome provisions into the deed without prior discussion or agreement. He said that he did two things in response. First, he did not return the signed originals of the agreement to Mr Ryan; that is, he did not “deliver” the agreement, in the belief that if the deed were not “delivered” it would
not be binding.5 Secondly, he telephoned Mr Ryan overseas and told him that the
agreement would need to be revisited on Mr Ryan’s return. Mr Mason said he understood that Mr Ryan accepted that the terms of the 22 July 2008 agreement were not agreed.
[23] For his part, Mr Ryan accepted that Mr Mason may have called to discuss client matters while he was overseas, but said that he had never called to discuss the agreement. For reasons set out later in this judgment it is not necessary for me to make any finding in relation to whether Mr Mason did call Mr Ryan and, if so, whether Mr Ryan agreed that the agreement required revision.
[24] Mr Ryan returned to work during August 2008. Neither he nor Mr Mason raised the matter of the deed. The practice was conducted in much the same way as before the 22 July 2008 agreement was signed. Although Mr Mason had the status of partner, he continued to be paid by the second plaintiff, FMML. He was not paid according to the formula set out in the agreement, but received salary increases in
September 2008 and April 2010, which took his salary up to $105,000. No partners’
5 See Property Law Act 2007, s 9.
meetings were held, and there was no discussion of partnership business, management of files, the firm’s direction, or employment matters. Mr Mason was not given any insight into the firm’s financial position, nor was he given accounting records or financial statements.
[25] The relationship between Mr Ryan and Mr Mason deteriorated during early
2010. In June 2010 Mr Ryan offered Mr Mason the option of either remaining in the firm, but working solely in litigation (an area of work Mr Mason had never worked in) or being bought out of the partnership. Mr Mason took the latter option, but no agreement was ever concluded.
[26] On 17 December 2010 Mr Ryan and Mr Mason signed a deed to terminate the partnership. They had been negotiating the terms of this document since June
2010. The deed was effective from that date, although Mr Mason’s employment with FMML was effective until 7 January 2011. Mr Ryan sent out a newsletter to clients of Ryan Law on 20 December 2010 which included, among other things, advice that Mr Mason had left the firm.
[27] Mr Mason opened Sean Mason Law in Morrinsville on 10 January 2011. Signage was displayed from around 10 January, and in early January Mr Mason arranged for a listing in the Yellow Pages. During January 2011, and subsequently, a number of authorisations were sent to Ryan Law, requesting the transfer of files to Sean Mason Law.
The plaintiffs’ claims: introduction
[28] Mr Ryan alleges that Mr Mason has breached the geographical restraint of trade and the non-solicitation clause: the former by practising law in Morrinsville, and the latter by soliciting clients from Ryan Law. He and FMML also allege that Mr Mason is in breach of duties of fidelity and confidence owed to Ryan Law and to FMML.
[29] It is appropriate to deal first with the claims that Mr Mason has breached the non-solicitation clause and the geographical restraint of trade. These two issues require, first, consideration of the 22 July 2008 agreement.
[30] Mr Ryan and Mr Mason agree that they each signed the 22 July 2008 agreement. They differed as to the following issues:
(a) Is Mr Mason bound by the 22 July 2008 agreement?
(b)If Mr Mason is bound by the 22 July 2008 agreement, is the geographical restraint of trade reasonable, and enforceable? If it is not reasonable, should it be amended pursuant to the Court’s powers under the Illegal Contracts Act 1970? Mr Mason accepted that if the geographical restraint of trade is reasonable, then he has breached it.
(c) If Mr Mason is bound by the 22 July 2008 agreement, is the non- solicitation clause reasonable, and enforceable? If it is not reasonable, should it be amended pursuant to the Court’s powers under the Illegal Contracts Act 1970? If it is reasonable (whether amended or not) has Mr Mason breached it?
[31] I consider each of these issues in turn.
Is the 22 July 2008 agreement binding?
Submissions
[32] On behalf of Mr Ryan, Mr Brant submitted that the 22 July 2008 agreement is binding. He submitted that a partnership agreement was not required to be in the form of a deed, and that as the agreement had been acted upon, it is evidence of the terms of the partnership agreement. In the alternative, Mr Brant submitted that even if the partnership agreement were required to be executed as a deed, the requirements of s 9 of the Property Law Act 2007 were met by Mr Mason notifying the Law
Society of his status as a partner, and holding himself out as a partner of Ryan law:
he submitted that there had been “delivery by conduct”.
[33] On behalf of Mr Mason, Mr Gudsell submitted that the 22 July 2008 agreement was not binding on Mr Mason, as he had not delivered it. Instead, he had deliberately retained both copies. Accordingly, it was submitted that the requirements of s 9 of the Property Law Act were not met. Mr Gudsell further submitted that, objectively, the Court could conclude that neither Mr Ryan nor Mr Mason considered the 22 July 2008 agreement to be binding. He submitted that this was evident from the fact that neither of the parties had acted in accordance with the agreement, either in the two years after it was signed, or at the time they were negotiating the deed to extinguish the partnership. Accordingly, he submitted, the partnership between Mr Ryan and Mr Mason was not governed by the 22 July 2008 agreement.
(a) Section 9 of the Property Law Act – is the 22 July 2008 agreement a valid deed?
[34] Section 9 of the Property Law Act sets out the requirements for a deed to be binding. Subsection 9 is relevant for present purposes:
9 Deed must be in writing, executed, and delivered
...
(9) A deed is binding when—
(a) delivered by—
(i) the person to be bound by it; or
(ii) another person having express or implied authority to deliver it on behalf of the person intended to be
bound by it; and
(b) either—
(i) it is apparent from the circumstances that the person to be bound by the deed intended to be bound by it;
or
(ii) if the binding force of the deed is subject to the fulfilment of 1 or more conditions, when each
condition is fulfilled.
[35] The Property Law Act does not include a definition of “deliver”, and counsel
did not refer me to any relevant authorities as to its definition.
[36] English authorities may be of assistance. The authors of Halsbury’s Laws of
England note that physical delivery is not necessary:6
No special form or observance is necessary for the delivery of a deed, and it may be made in words or by conduct. ... What is essential to the delivery of the document as a deed is that the party whose deed the document is expressed to be (having first sealed it) must by words or conduct expressly or impliedly acknowledge his intention to be immediately and unconditionally bound by the provisions contained in it.
[37] In Vincent v Premo Enterprises (Voucher Sales) Ltd,7 Lord Denning confirmed that:
A deed is binding on the maker of it, even though the parts have not been exchanged, as long as it has been signed, sealed and delivered. “Delivery” in this connection does not mean “handed over” to the other side. It means delivered in the old legal sense, namely, an act done so as to evince an intention to be bound. Even though the deed remains in the possession of the maker, or of his solicitor, he is bound by it if he has done some act evincing an intention to be bound, as by saying: “I deliver this my act and deed.”
There are similar comments in Powell v London and Provincial Bank,8 and in
Windsor Refrigerator Co Ltd v Branch Nominees Ltd.9
[38] In reliance on the English authorities, Mr Brant said that Mr Mason’s actions in notifying the Law Society of his change of status to that of partner in Ryan Law immediately after signing the 22 July 2008 agreement, and by holding himself out as a partner thereafter, was an acknowledgement of the document which evinced an intention to be bound, thus amounting to delivery.
[39] The submission, however, appears to conflate sub-paragraphs (a) and (b) of s 9(9) of the Property Law Act. Sub-paragraph (a) requires delivery, and sub- paragraph (b) requires the demonstration of an intention to be bound. They are separate requirements, and both must be met for the deed to be binding. Mr Mason’s conduct is better seen as meeting the separate requirement under sub-paragraph
(b)(i), rather than the delivery requirement under sub-paragraph (a)(i).
6 Halsbury’s Laws of England (4th ed, reissue, 2007, online ed) vol 13(1) Deeds, at [31].
7 Vincent v Premo Enterprises (Voucher Sales) Ltd [1969] 2 QB 609 (CA), at 614.
8 Powell v London and Provincial Bank [1893] 2 Ch 555 (CA), at 566.
9 Windsor Refrigerator Co Ltd v Branch Nominees Ltd [1961] Ch 88 (ChD), at 98.
[40] That conclusion may not, however, be determinative of whether the 22 July
2008 agreement was binding. It is necessary to consider whether the agreement can be binding as a simple contract.
(b) Is the 22 July 2008 agreement valid and binding as a contract?
[41] In Domb v Owler,10 (which concerned the validity of a lease agreement), Salmond J observed:
It is not necessary that such an instrument so signed and attested should describe itself as a deed, any more than this was necessary at common law in the case of an instrument sealed and delivered. On the other hand, every instrument which is so signed and attested is not necessarily a deed, any more than every instrument under seal was necessarily a deed at common law.
[42] In Morley v Spencer,11 the Court of Appeal considered whether an agreement was a deed or a simple contract. The issue was relevant in that case as the different limitation periods for deeds and contracts meant that a cause of action would have been time-barred for a contract but not for a deed. The Court of Appeal held that the agreement was a contract. Similarly in Tokley v Robinson,12 Rodney Hansen J held that although the drafter of a loan agreement appeared to have intended it to take effect as a deed, the agreement “may be nevertheless evidence of the agreement reached by the parties” even though it was not signed, and not therefore a valid deed.
[43] The 22 July 2008 agreement provides, at clause 15.5:
This document is executed as a Deed.
This may be seen as indicating the parties’ intention that if not valid as a deed, the document was not to be considered a binding agreement. Mr Gudsell submitted that the parties’ failure to comply with the terms of the 22 July 2008 agreement, in particular in relation to salary increases, demonstrated that neither Mr Mason nor Mr
Ryan considered that that document was binding, as it was not a valid deed.
10 Domb v Owler [1924] NZLR 532 (SC), at 537.
11 Morley v Spencer [1994] 1 NZLR 27 (CA).
12 Tokley v Robinson HC Hamilton CIV-209-419-136, 10 March 2011.
[44] Against that, both parties signed the document, and Mr Mason gave formal notification to the Law Society that he was now a partner of the firm, and his name was included as a partner on the firm’s letterhead. Viewed objectively, a reasonable bystander would have concluded that Mr Mason and Mr Ryan intended to be bound, and for Mr Mason to be known to the world as a partner of Ryan Law, once the agreement was signed, rather than after the agreement was delivered. This is notwithstanding that, as lawyers, both parties would reasonably be expected to be well-acquainted with the formalities required of deeds.
[45] To conclude otherwise could risk undermining the certainty of a contract, which usually dictates that a signature on a written agreement indicates acceptance of the terms of that agreement, subject to a few very limited exceptions, such as a plea of non est factum, which is rightly not pleaded here. It is also relevant that in this case there does not appear to have been any particular reason (save for clause
15.5) why the partnership agreement had to be executed a deed, as opposed to a simple contract.
[46] Further, it is puzzling that, if Mr Mason indeed did not intend to be bound by the 22 July 2008 agreement, he did not cross out his signature and raise his objection to its terms with Mr Ryan on his return. Mr Ryan was absent for only 5-6 weeks, and arrangements were in place for the firm to carry on business in Mr Ryan’s absence, whether or not Mr Mason was a partner. That said, Mr Ryan’s failure to make any reference to the agreement upon his return, or indeed at any time until the relationship deteriorated, is also puzzling.
[47] I conclude that the 22 July 2008 agreement was binding once Mr Mason signed it, notwithstanding that it was not delivered, as required by s 9(9)(a) of the Property Law Act. It is, therefore, not necessary to determine the factual issue concerning the telephone call Mr Mason said he made to Mr Ryan while Mr Ryan was overseas.
[48] It is therefore necessary to consider whether the terms of the 22 July 2008 agreement, in particular the geographical restraint of trade and the non-solicitation clause, are enforceable.
Introduction
[49] The restraint clauses are contained in clause 9 of the 22 July 2008 agreement, which provides:
9.0 PROPERTY IN THE PARTNERSHIP BUSINESS
9.1Sean [Mr Mason] shall not by this Partnership Agreement or the operation of the partnership
(a) obtain any rights in respect of the business or assets of the partnership,
(b) nor be liable for any of the partnership debts,
and in the event of termination of the partnership for any reason shall not be entitled to any payment or compensation in respect of the value of the partnership business or assets nor be liable to pay any amount is repayment of any partnership debt.
9.2In the event of termination of the partnership (other than by entry into a full partnership the members of which include Sean and Mike [Mr Ryan], Sean shall not for a period of five years from the date of termination
(a) approach or solicit any client or clients of the former partnership for the purpose of seeking to create or maintain a relationship with such client or clients or to obtain business from them or to seek to act for them in any way, or
(b) set up, be employed in, or have any beneficial interest in, a business providing services which would operate in competition to the business or any part of it carried out by the former partnership within the radius of 20km from the Morrinsville premises.
[50] Clause 9.2(a) is the non-solicitation clause, and clause 9.2(b) is the geographical restraint of trade. Mr Ryan claims that both are enforceable and that
Mr Mason has breached both of them. Mr Mason claims that neither is enforceable.
13 The geographical restraint of trade and the non-solicitation clause are collectively referred to as
“the restraint clauses”.
[51] The authors of Law of Contract in New Zealand comment:14
Although the precise ambit of the restraint of trade doctrine is uncertain, a fair working definition is that a contract in restraint of trade is one whereby the rights or liberty of one or both of the parties to carry on a business, trade or profession, as that party or parties may wish, is restricted in time or geographical scope. ... The general principle is that all contractual provisions in restraint of trade are prima facie void, and therefore unenforceable, but where the party seeking to enforce the restrictive provision establishes that the restriction is reasonable it may be enforced.
(footnotes omitted)
[52] In Brown v Brown, Richardson J said:15
It is well settled law that to be enforceable a covenant in restraint of trade should be no wider than the circumstances of the case reasonably require. Reasonableness in the relevant sense relates to the legitimate interests of the parties to the covenant and to the wider public interest.
[53] Restraints upon the vendor of a business in favour of the purchaser are upheld more readily than restraints on a former employee in favour of the employer.16 The present case, where Mr Mason was a salaried partner (employed by FMML) rather than an equity partner, is best seen as analogous to the “employment” category, rather than the “sale of a business” category.
[54] In Bates v Gates,17 Thorp J affirmed the principle expressed in Brown v
Brown, and stated the subsidiary principles relevant to an employment contract:18
(a) That restraints by employers on employees are scrutinised with particular care and enforced only to the extent that they are required to protect a proprietary interest of the employer;
(b) That such a restraint is generally unreasonable if its injurious effect on the employee is greater than its benefit to the employer;
14 John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (4th ed, Lexis
Nexis, Wellington, 2012) at [13.9.1].
15 Brown v Brown [1980] 1 NZLR 484 (CA), at 491.
16 Mason v Provident and Supply Co Ltd [1913] AC 724 (HL).
17 Bates v Gates (1986) 1 NZELC 95,269 (HC).
18 At 95,272-95,273.
(c) That reasonableness is to be measured at the time the covenant was given, although developments reasonably within the contemplation of the parties at that time may be taken into account;
(d) That the question whether or not the agreement was a fair agreement in all the circumstances or was a one-sided arrangement only entered into because of the superior bargaining power of the employer is relevant to reasonableness;
(e) That while the principal parameters used to determine reasonableness are the area, nature and duration of the restraint, those are not to be considered as separate factors, since reasonableness depends upon the assessment of all relevant surrounding circumstances; and
(f) That the nature of the employer’s business and of the relationship between the employee and the customers or clients of that business are important in considering whether restraint is reasonably necessary.
[55] In its judgment in Fuel Espresso Ltd v Hsieh,19 the Court of Appeal accepted that the adequacy of consideration may be relevant to determining the reasonableness of the restraint.
[56] If a restraint of trade clause is held to be unreasonable, the court has a wide power to modify the clause, pursuant to s 8 of the Illegal Contracts Act 1970, which provides:
8 Restraints of trade
(1) Where any provision of any contract constitutes an unreasonable restraint of trade the court may—
(a) delete the provision and give effect to the contract as so amended; or
(b) so modify the provision that at the time the contract was
entered into the provision as modified would have been reasonable, and give effect to the contract as so modified; or
(c) where the deletion or modification of the provision would so alter the bargain between the parties that it would be
unreasonable to allow the contract to stand, decline to enforce the contract.
(2) The court may modify a provision under paragraph (b) of subsection (1), notwithstanding that the modification cannot be effected by the deletion of words from the provision.
19 Fuel Espresso Ltd v Hsieh [2007] 2 NZLR 651 (CA), at [20].
Are the restraint clauses void for lack of consideration?
Submissions
[57] Mr Brant submitted for Mr Ryan that there was ample consideration, provided by:
(a) The whole of the 22 July 2008 agreement;
(b) The mutual use of name and reputation (in particular, Mr Mason’s
elevation to the status of partner in the firm); (c) The indemnity provided by Mr Ryan;
(d)The provision in the 22 July 2008 agreement for Mr Mason to receive an annual salary increase, at least equivalent to any increase in the CPI, when there was no obligation to increase salary in the employment agreement;
(e) The benefit to Mr Mason of Mr Ryan having to deal with him (as the other party to the 22 July 2008 agreement) before Mr Ryan’s daughters could be introduced to the partnership; and
(f) The increase in Mr Mason’s salary from $70,000 to $100,000 as from
4 December 2007 which, he submitted, was as result of the agreement in principle being reached that Mr Mason would be admitted to partnership.
[58] For Mr Mason, Mr Gudsell submitted that there was no, or no adequate, consideration for the restraint clauses and that they were, therefore, unenforceable. He submitted that upon entering into the 22 July 2008 agreement Mr Mason received nothing apart from the status of partner. He received no share of the partnership assets or profits, the indemnity provided for in the agreement was already available to him, and he received the same salary as he had been paid for the previous six
months. Mr Gudsell submitted that partnership status on its own did not provide consideration for the restraint clauses. In the alternative he submitted, in the event that I were to find that the change of status did satisfy the requirement for consideration, then it was “woefully inadequate” consideration for the onerous restraint covenants imposed on Mr Mason.
Discussion
[59] In its judgment in Fuel Espresso Ltd, the Court of Appeal held:20
... The traditional definition of consideration requires that there be “something of value” which must be given, and that consideration is either some detriment to the promisee or some benefit to the promisor. But the law does not enquire into the adequacy of the consideration, nor, as the Judge seems to have thought, does it require an extra ‘premium’ for a restraint of trade clause. It is also a very well settled principle of contact law that even mutual promises can be consideration for each other. As Treitel, Contract (9th ed), pp66–67 puts it:
“A person who makes a commercial promise expects to have to perform it. ... Correspondingly, one who receives such a promise expects it to be kept. These expectations ... can properly be called a detriment and a benefit; and they satisfy the requirement of consideration in the case of mutual promises.”
The Judge was accordingly wrong as a matter of law. Not only was there an arguable case for consideration; in this instance there was consideration.
We accept that the issue of adequacy of consideration may be relevant to the question whether a restraint of trade is reasonable. ...
[60] I reject Mr Brant’s submission that the increase in Mr Mason’s salary to
$100,000 on 4 December 2007 can be regarded as consideration for the 22 July 2008 agreement. I have found, at [10] above, that the agreement in principle was reached in late January or early February 2008. The increase to $100,000 preceded the agreement in principle, and is therefore past consideration. Further, at the time the agreement in principle was reached, the terms of that agreement did not include either the geographical restraint of trade or the non-solicitation clause. However, I accept that consideration was otherwise provided by virtue of the mutual promises in the agreement, in particular, the elevation of Mr Mason to the status of partner.
Accordingly, I find that there was consideration for the 22 July 2008 agreement.
20 Above n 19, at [18]–[20].
Are the restraint clauses reasonable?
Submissions
[61] Mr Brant submitted that both of the restraint clauses are reasonable, in all the circumstances. The circumstances included the “long cycle time for client repeat business”, and the fact that most of Ryan Law’s clients were based within a 20 kilometre radius of Morrinsville. He also submitted that the payment of $100,000 in December 2007 which (he submitted) was “directly linked” with the partnership, supported the reasonableness of the restraint clauses, because it was well above an average salary for a person of Mr Mason’s experience, outside of Auckland and Wellington.
[62] Mr Brant also submitted that the relationship Mr Mason had with the client base of Peter Ryan’s practice when Mr Ryan bought it in June 2007 was a further circumstance underpinning the reasonableness of the restraint clauses, given that Mr Ryan had paid for the client base and had agreed to continue to employ Mr Mason, and subsequently admit him to partnership. Mr Brant further submitted that the restraint clauses were reasonable given that Mr Mason would otherwise be able to use his elevated status and long association with clients to his own advantage, in the context of Mr Ryan having paid for the practice. Accordingly, Mr Brant submitted, the restraint clauses struck a reasonable balance between protecting Mr Ryan’s client base and trade connections in the area, while giving Mr Mason the ability, on leaving the firm, to practise law in surrounding towns and cities. In this respect, he submitted that Mr Mason could practise law outside the 20 kilometre restraint area in towns such as Matamata, Huntly, Cambridge, Ngaruawahia, Te Awamutu, or Hamilton. He submitted that Mr Mason would not need to move house to access a market for lawyers.
[63] Mr Gudsell submitted that the restraint clauses were not reasonable. As noted earlier, he submitted that any consideration for the clauses was woefully inadequate. Mr Mason had received no more than partnership “in name”, he remained as an employee after the 22 July 2008 agreement was signed, and did not receive increases in salary under the partnership agreement. Mr Gudsell submitted that against such
inadequate consideration, the restraint clauses must fail as being unreasonable both in their duration and scope.
[64] On the question of reasonableness, it is necessary to consider the non- solicitation clause and the geographical restraint of trade separately. I turn first to the geographical restraint of trade.
Is the geographical restraint of trade reasonable?
[65] I note, first, that I have rejected Mr Brant’s submission that the increase of Mr Mason’s salary to $100,000 can be considered as consideration for the restraint clauses. This is because that salary increase occurred before any agreement in principle that Mr Mason would be admitted as a partner. For the same reason, I reject Mr Brant’s submission that that payment should be considered in the context of assessing the reasonableness of the clauses.
[66] In Bridge v Deacons (a firm),21 the Privy Council upheld a geographical restraint of trade which prohibited Mr Bridge from “acting as a solicitor, notary, trade mark or patent agent ... in the Colony of Hong Kong ... for any person, firm or company who was at the time of his ceasing to be a partner or who had during the period of three years prior thereto been a client of [Deacons]”. It is immediately obvious that that restraint is of more limited scope than the geographical restraint of trade in the 22 July 2008 agreement, which prohibits Mr Mason from acting as a solicitor, at all.
[67] That aside, the circumstances in Deacons are clearly distinguishable. Mr Bridge was not a salaried partner: he was a full capital (equity) partner. He received a profit share. Under his partnership agreement he had a share in the partnership assets and goodwill. Under the 22 July 2008 agreement, Mr Mason was “a salaried
partner, entitled to a fixed salary, having no interest in the capital of the business”,22
he was to be “treated as an employee of [Mr Ryan] for all purposes other than the giving of undertakings on behalf of the partnership and being able to bind the
21 Bridge v Deacons (a firm) [1984] AC 705 (PC).
22 22 July 2008 agreement at cl 2.1.
partners in respect of obligation arising in the course of the partnership activity”,23 the agreement was to be void ab initio if “the Inland Revenue Department treats the parties as partners for income tax purposes”,24 all of the partnership profits “shall belong to [Mr Ryan]”,25 Mr Mason “shall not have any power to bind the partnership in respect of any obligations of the partnership arising in the normal course of the partnership’s business”,26 he did not “obtain any rights in respect of the business or assets of the partnership”, and he was not “liable for any of the partnership debts”.27
[68] There is no comparison between the respective positions of Mr Bridge and Mr Mason. The decision in Deacons does not support upholding the geographical restraint of trade in the present case. I accept Mr Gudsell’s submission that the duration and scope of the geographical restraint of trade must be assessed in the context of Mr Mason’s being an employee, not a partner.
[69] In Walley v Gallagher Group Ltd,28 Judge Colgan described a four year restraint as “almost unheard of in the case law let alone upheld as reasonable” and observed that “it is exceptional for a restraint of even one year’s duration, let alone longer, to have been found to be reasonable”.29 In that case, the Judge reduced the duration of the restraint to 12 months, but upheld the “world-wide” scope of the restraint as being necessary, given the nature of the industry. The decision was upheld on appeal.30
[70] In James & Wells Patent and Trademark Attorneys v Snoep,31 Judge Couch upheld a restraint of trade covenant which prohibited Mr Snoep, a salaried partner, from practising as a patent attorney for any of the firm’s clients for 12 months. The plaintiff had waived a geographical restraint, which would have prohibited Mr Snoep
from practising as a patent attorney within 20 kilometres of James & Wells’ offices.
23 At cl 5.1(a).
24 Ibid.
25 At cl 6.1.
26 At cl 7.1.
27 At cl 9.1.
28 Walley v Gallagher Group Ltd [1998] 3 ERNZ 1153 (EmpC).
29 At 1187.
30 Gallagher Group Limited v Walley [1999] 1 ERNZ 490 (CA).
31 James & Wells Patent and Trademark Attorneys v Snoep [2009] ERNZ 284 (EmpC).
The Judge observed that the period of 12 months was “at the upper end of the range of what was reasonable”, and took into account that the restraint did not prevent Mr Snoep from providing other services to those clients, or from practising as a patent attorney for other clients.32
[71] In Bates v Gates,33 a restraint of trade on an employed solicitor was reduced both in geographical area, and in duration, from two years to 12 months.
[72] In Cooney v Welsh,34 a restraint of trade clause, on appeal to the Court of Appeal, was modified to be for two years, and to prohibit Mr Welsh from acting as a barrister or solicitor for any person for whom he had acted when employed by Mr Cooney’s firm, or soliciting diversion of Mr Cooney’s clients. The Court of Appeal upheld the High Court decision that a geographical restraint was unreasonable.
[73] I accept Mr Gudsell’s submission that the geographical restraint is unreasonable, both in its duration and geographical range, and must be held to be unenforceable. Its duration of five years is beyond what has been held to be reasonable in similar cases, by a considerable margin.
[74] Further, in the particular circumstances of this case, I am not persuaded that any geographical restraint was warranted. The Court of Appeal observed in Cooney v Welsh that it would be contrary to the public interest for Mr Welsh to be restrained from practising in competition with Mr Cooney in Ashburton, an area which sustained seven legal firms. The present case is similar, in that Morrinsville sustained four legal practices at the time of the 22 July 2008 agreement, and there were also legal practices in nearby towns.
[75] I have concluded that the geographical restraint of trade is unreasonable and unenforceable, and that I should not exercise my power under s 8 of the Illegal
Contracts Act to modify it.
32 At [32].
33 Above, n 17.
34 Cooney v Welsh [1993] 1 ERNZ 407 (CA).
[76] In the light of that finding, I am not required to consider whether Mr Mason is in breach of the geographical restraint of trade although, as I have recorded earlier, Mr Mason accepted that if the restraint were held to be enforceable, he had breached it by practising in Morrinsville.
[77] Mr Ryan’s first cause of action fails.
Is the non-solicitation clause reasonable?
[78] For the same reasons as advanced in respect of the geographical restraint of trade, Mr Brant submitted that the five-year non-solicitation clause was reasonable. He also submitted that the non-solicitation clause did not interfere with a client’s right to choose his or her own lawyer, as while Mr Mason could not solicit clients, clients could approach Mr Mason and instruct him.
[79] Mr Gudsell submitted that the non-solicitation clause was unreasonable and unenforceable, also for the same reasons as advanced in respect of the geographical restraint of trade.
[80] I have concluded that in the circumstances of this case, having regard to the authorities referred to earlier, and bearing in mind my decision as to the geographical restraint of trade, a non-solicitation clause could be enforced.
[81] In Bates v Gates, the two-year duration of a clause prohibiting Mr Gates from acting for clients of the firm (other than relatives or clients introduced by him) was reduced to 12 months. In Cooney v Welsh, the two-year duration of a clause prohibiting Mr Welsh from acting for or soliciting clients was upheld. In James & Wells v Snoep, the 12-month duration of a clause which prohibited Mr Snoep from acting as a patent attorney for any of the firm’s clients was held to be “at the upper end of the range”.
[82] It must be noted that in each of these cases, the relevant clause prohibited the solicitor from acting for the firm’s clients, whereas in the present case the non- solicitation clause prohibits Mr Mason from soliciting clients. As Mr Ryan accepted,
the non-solicitation clause does not prohibit Mr Mason from acting for clients who approach him. That factor may justify a longer duration of the restraint. Even bearing that in mind, however, I am not satisfied that a five-year duration of the non- solicitation clause is reasonable. It is well beyond the duration that has been upheld in similar cases, even after allowing for the difference between being prohibited from acting for clients rather than soliciting clients.
[83] What is a reasonable duration of the non-solicitation clause must be a matter of judgment. Having considered the nature of the business, and the particular circumstances of the practice of Ryan Law, I have concluded that the duration of the non-solicitation restraint should have been two years. Accordingly, I uphold the non- solicitation clause, but modify it pursuant to s 8 of the Illegal Contracts Act, so that
its duration is to be two years from the date of termination.35
Has Mr Mason breached the non-solicitation clause?
[84] In the light of my finding that the non-solicitation clause, modified to be of two years duration, is enforceable, I am required to determine whether Mr Mason breached it.
[85] Mr Brant submitted that Mr Mason solicited clients of Ryan Law by contacting them by telephone to advise them that he was leaving Ryan Law to practise on his own account, asking them to move their business to his practice, preparing a form of authority to uplift client files, and sending out a letter and authorities to Ryan Law clients. He submitted that Mr Mason uplifted 42 client files within the first week of opening his practice and that, given the time of year (late December/early January) that would have been unlikely to occur except at Mr Mason’s instigation.
[86] Mr Brant submitted that Mr Mason’s soliciting of clients, and thus breach of
the non-solicitation clause, was established by the following evidence:
35 The date of termination was 17 December 2012, see [26], above.
(a) The large number of authorities to uplift files sent to Ryan Law within a few days of Mr Mason opening his practice, and before he had advertised the practice.
(b) A large number of open files were uplifted.
(c) Mr Mason prepared a precedent uplift authority, directed at Ryan
Law.
(d)As at 7 January 2011, Mr Mason had no clients. By the end of three weeks after that date, he had 89 uplift authorities, and 28 open files.
[87] Mr Brant also submitted that statements made by Mr Mason to Mr Ryan, and to employees of Ryan Law, amounted to admissions by Mr Mason that he had solicited clients. He submitted that Mr Mason had acknowledged that he told Mr Ryan that he “had to survive”, and that he had told the staff members he was “going through a list” (or “the list”) of clients. Mr Brant submitted that both of those should be taken into account when considering the other evidence referred to.
[88] Mr Gudsell submitted that the evidence fell well short of establishing on the balance of probabilities that Mr Mason has solicited clients. With respect to the uplift authorities, while acknowledging that a large number of Ryan Law clients have transferred their business to Mr Mason, he submitted that the number of uplift authorities had to be seen in their factual context. He submitted:
(a) A number of clients who provided uplift authorities were relatives or close family friends of Mr Mason, who would have known that Mr Mason would be commencing practice on his own account, and would naturally want him to continue as their solicitor.
(b)In many cases, if a family wanted to transfer its business, several uplift authorities (one for each file) were required. Mr Mason in his evidence said that in the week 31 January to 6 February 2011, eight
families accounted for 19 uplift authorities, and in the week 14 to 20
March 2011, five families accounted for 14 uplift authorities.
(c) Clients who provided uplift authorities had had a professional relationship with Mr Mason for far longer than the duration of the 22
July 2008 agreement – in many cases since 2004 – and long before Mr
Ryan bought the practice.
(d)Mr Ryan had advised all Ryan Law’s clients, in the newsletter sent out on 20 December 2010, that Mr Mason was leaving the firm. Mr Ryan had never previously sent out a Christmas newsletter, and Mr Mason did not know about it until told about it by local business people, who had received it.
(e) The business community in Morrinsville is small. Mr Mason said in evidence that in his first week in practice he met several people in the street who were aware that he had left Ryan Law, either by way of the newsletter, or by having received a letter from Mr Ryan offering to replace wills where Mr Mason was named as an executor.
(f) Mrs Andrea Mason (Mr Mason’s wife) said in evidence that she received a lot of telephone calls from clients of Ryan Law, who had received the newsletter, asking if they could keep Mr Mason as lawyer and have their files transferred to him. Mrs Mason also received an email on 30 December 2010 from Mr Mason’s bank manager, saying that her son had received the newsletter, and asking if her family’s files could be shifted to Mr Mason.
(g) Mr Mason’s office is in a highly visible location in a small town.
(h)Mr Gudsell also referred to the evidence of two ex-clients of Ryan Law who had transferred their business to Mr Mason. One of the clients had shifted the business for 17 separate individuals or entities to Mr Mason, and the other had transferred the business for five
separate individuals or entities. Both said they were never asked by Mr Mason to move their work to him, and both learnt that he had left Ryan Law by way of communications from that firm.
[89] Regarding the submission that Mr Mason had admitted having solicited clients, Mr Gudsell submitted that Mr Brant had quoted selectively from the evidence.
[90] I am not satisfied that Mr Mason solicited clients. The evidence referred to by Mr Brant does not meet the standard of proof on the balance of probabilities.
[91] First, the number of uplift authorities, and the creation of an uplift authority precedent, are equally indicative of Mr Mason’s long-standing professional relationship with clients, and his hope that they might wish to transfer their work. They do not point to his having solicited the clients. Secondly, the evidence of the two ex-clients was clear, that Mr Mason had not solicited the transfer of their work. Thirdly, there is no evidence that Mr Mason took any list of clients from Ryan Law, or any of the firm’s templates or precedents.
[92] The submission that Mr Mason acknowledged to Mr Ryan that he had contacted clients is founded on a misinterpretation of the cross-examination of Mr Mason. The passage referred to by Mr Brant needs to be seen in full:
Q. Mr Ryan’s evidence is, at paragraph 67 for my friend’s benefit, is that on the 15th January 2011 he rang you to ask if you were approaching his clients directly.
A. Right.
Q. Do you recall him asking you that?
A. I don’t believe those were his exact words, he asked me if I was
cold-calling his clients.
Q. He acknowledged you said that – you acknowledged that you were contacting his clients?
A. I don’t believe that’s accurate, um, my recollection is that I said that, um, when they were contacting me or calling me, ah, then I was returning calls to them.
Q. You said that you didn’t consider yourself bound by the non- solicitation covenant, do you recall saying that to him on the 15th January?
A. No I do not.
Q. And you responded, he says, “I have to survive,” or words to that
effect?
A. I told Mr Ryan that when, ah, people were ringing me I was ringing them back and I did not consider that to be solicitation, um, and that I had to survive, yes.
[93] I cannot construe Mr Mason’s answers as an acknowledgement that he was soliciting clients. He acknowledged that he had responded to calls made to him, but that is not solicitation.
[94] The evidence of the two Ryan Law employees also needs to be seen in its full context. The first, Ms B, said in her evidence-in-chief that she and another employee, Ms F, had gone to Mr Mason’s new office on 21 January 2011 to deliver some documents. She said:
While we were there Sean told us that he had phoned some of his old clients. He said he had a list he was working from with regard to contacting clients, but that he had been too busy to complete working through the list. He gave me the clear impression that he did have a list. He commented that his wife kept nagging him to get on with ringing clients for the list but he was far too busy.
[95] Ms F’s evidence was that after exchanging greetings with Mr Mason he said:
They had been “absolutely flat out”. He went to say he had been ringing people. Then he said “[Mrs Mason] has been on my back to work through the list, haven’t you dear.” I am confident that those are the words he used except that I am unsure whether he said “the list” or “a list”. He certainly gave me the impression that he had a list he was working through.
[96] In their cross-examinations, both Ms B and Ms F acknowledged that they had not seen any list, nor had they seen any emails that Mrs Mason had sent to Mr Mason, setting out the names of persons who had called the office and who Mr Mason was required to call.
[97] Mr Mason was cross-examined as to the evidence of Ms B and Ms F. He
agreed that he had been “flat out”. The cross-examination then continued:
Q. And that you had been ringing people, do you recall saying that?
A. I think I said that I had been, ah, contacting people, who, who had contacted me, yes.
Q. And do you recall saying, ... “[Mrs Mason] has been on my back to
work through the list, haven’t you dear?”
A. Words to that effect. I’m not sure if it was the list or a list.
Q. And [Ms B] says that you had phoned some old clients. While we are, paragraph 4 of [Ms B’s] brief, “While we were there Sean told us he had phoned some of his old clients,” that was her recollection?
A. That’s her recollection yes.
Q. And did you say that, that you’d rung some of your old clients?
A. I may well have.
Q. He said that you, he, you had a list you were working from with regard to contacting clients, do you recall saying that?
A. No. No, I recall saying that I, I had a list of people that I had to call, ah, and I was working through that list, ah, that list was the list of, um, um, there’s an email list of people who had contacted the office which I was to return calls to.
Q. So when a call comes in and you're busy, I presume your wife takes the message?
A. Yes.
Q. And then emails it through to you? A. Yes.
Q. “Please call such and such”.
A. Indeed.
Q. Phone number?
A. Indeed. That or, or she would, ah, make a note on a, on a piece of paper or somewhere and then periodically send me through one email which might have four or five, three, four, five, ah, requests for me to contact people.
Q. And he, you commented that, this is [Ms B’s] evidence, that your wife kept nagging you to get on with ringing the clients, from the list but you were too busy?
A. Indeed I was, I was behind on returning people’s calls, both client and non-client. I mean, I was receiving calls from all sorts of people, um, clients, former clients, real estate agents, bank people, you know.
Q. And you said that you were unable to get to the work, to the list because you were too busy, is that correct?
A. Indeed, yes.
[98] I cannot construe Mr Mason’ statements to Ms B and Ms F as being evidence that he was soliciting clients. I accept the evidence of Mr Mason and his wife that he was working through a list of people who had called the office, and who he had to call back. The evidence of Ms B and Ms F does not, and cannot, contradict that.
[99] Mr Brant submitted that all of the matters he referred to made up a circumstantial case from which I should conclude that Mr Mason had solicited clients. Having considered all of the matters he referred to, together, I am not satisfied that such a case is made out on the balance of probabilities.
[100] Accordingly, Mr Ryan’s second cause of action fails.
Has Mr Mason breached fiduciary duties owed to Mr Ryan and FMML?
[101] Mr Ryan and FMML allege in the fourth cause of action36 that Mr Mason owed fiduciary obligations to Mr Ryan (as partner) and to FMML (as an employee). They allege that those duties comprised:
(a) A duty of confidence not to use confidential information imparted to him in his capacity as an employee and/or partner for his own benefit; and
(b) A duty of good faith as an employee and/or partner practising in Ryan
Law.
[102] It is alleged that Mr Mason used information gained from Ryan Law to start up his own practice, that he uplifted a number of client files within a short period, and that he used his knowledge of Ryan Law to approach clients of high value, for
whom Ryan Law was undertaking commercial and private transactions.
36 It will be recalled that the third cause of action was abandoned.
[103] The fourth cause of action may be dealt with quite shortly. Mr Mason did not dispute that he owed fiduciary duties as an employee of FMML, and as a salaried partner of Mr Ryan. He denied any breach of those duties.
[104] I have found, in relation to the second cause of action, that Mr Mason did not solicit clients of Ryan Law. I also recorded, at [92] above that there was no evidence that Mr Mason had taken any client list, or any of the firm’s templates or precedents, from Ryan Law. It follows that the fourth cause of action must fail, as did the second.
A further alleged breach
[105] In his closing submissions Mr Brant submitted that Mr Mason had also breached his duty of good faith owed to Mr Ryan by:
... misrepresenting the terms of the partnership agreement, attempting to negotiate on the basis of those misrepresented terms, withholding the physical copy from Mr Ryan and causing his solicitor to make inquiries designed to discover the extent of Mr Ryan’s knowledge of the content of the agreement ... .
[106] The plaintiffs’ amended statement of claim did not contain a pleading to this effect. The pleaded breaches, at paragraphs 45 and 46, referred to soliciting clients of Ryan Law. Mr Brant submitted that the further alleged breach was covered by paragraph 18(d) of the amended statement of claim. This alleged that “Mr Mason owed a duty of good faith as a partner practising in the business of Ryan Law”.
[107] I do not accept that the breach alleged in Mr Brant’s closing submissions was pleaded. No amendment to the pleading was sought. Accordingly, it is not before me for determination.
[108] I record, however, that if the further alleged breach were before me for determination, I would not find in favour of Mr Ryan. I have, at [46], above, noted Mr Ryan’s and Mr Mason’s actions (or rather, lack of action) regarding the 22 July
2008 agreement after it was signed. On the evidence before me, I would conclude that both Mr Ryan and Mr Mason were in some confusion as to which version of the
partnership agreement was in force. I am not satisfied that there was any deliberate action by Mr Mason that was in breach of his duty to Mr Ryan.
Result
[109] The plaintiffs fail on each cause of action. There is, therefore, no need for a
hearing as to quantum. The plaintiffs’ claims are dismissed.
[110] Costs should follow the event, on a 2B basis, together with reasonable disbursements as certified by the Registrar. I certify for second counsel.
Andrews J
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