The Facts
Man signs employment contract containing post-employment “restraint of trade” clause
In 2003, a nineteen-year-old man began employment as a trainee accountant with a major accounting firm in Perth. He signed an employment contract that included a post-employment “restraint of trade” clause.
Restraint of trade clauses are often included by employers to protect their client relationships should an employee leave and start up work in competition.
However, clauses of this nature are not always easy to enforce because the law recognises that it is not in the public interest to restrict a person’s ability to earn a living or to restrict healthy competition between businesses. The onus to prove that a particular restraint clause is “reasonably necessary” to protect “legitimate business interests” therefore rests with the employer.
Restraint clause prevents man from acting for former clients
The clause in this agreement sought to prevent the employee from doing work for any client of the firm if he had provided accounting services to that client at any time in the three years before he left the firm.
If the employee breached this clause, then the contract specified he was to pay liquidated damages to the firm in a sum equal to “75% of the fees incurred by the client” in the last full financial year that the firm had acted for the client.
Employee develops close relationship with client
The employee remained with the firm for over six years, and although he did not obtain professional accounting qualifications during this time, he was eventually promoted to the role of supervising accountant.
The employee dealt directly with clients in his role and formed a close relationship with one client in particular, who he did work for on a recurring basis.
Employee leaves but continues to work for clients
In 2009, while still working part-time at the accounting firm, the employee began to work directly with that client three days per week. Two months later, he resigned from the accounting firm and started working for a rival accounting firm in Perth on the other two days of his working week.
Shortly after, the client sought quotations from the employee’s former and current firms. The client subsequently terminated the retainer with the former firm in favour of the new, rival firm.
The former firm commenced proceedings against the employee for damages for breach of the restraint of trade clause, claiming a sum equivalent to 75% of the fees for the client (and other smaller clients) for the year to 30 June 2009. It was for the court to determine whether the clause in this case was reasonably necessary to protect a legitimate business interest of the former firm.
Expert commentary on the court's decision
Court of Appeal finds in favour of accounting firm
In Birdanco Nominees Pty Ltd v Money [2012] VSCA 64, the Supreme Court of Victoria Court of Appeal found that the restraint was no more than was reasonably required to protect the legitimate business interests of accounting firm Bird Cameron.
The court allowed the appeal and ordered Mr Liam Money to pay Bird Cameron $188,495.65 plus interest, as well as paying his former employer’s legal costs.
Definition of the “the Services” in the employment contract
At the heart of the appeal was the definition of the term “the Services” contained in the restraint clause. Mr Money contended that the trial judge had erred in finding he had provided the services which enlivened the restraint clause, as the definition given in his employment contract was “the practice of Chartered Accountants, taxation agents, business advisor and activities of a related nature”, whereas he was not a qualified accountant.
At first instance, the trial judge disagreed and held that “the Services” would extend to services provided by Mr Money is his first year as a trainee, even if the work was of a limited nature. The Court of Appeal decided that Mr Money was providing “the Services” to the client, the Szencorp Group, within the meaning of the restraint clause while he was employed by Bird Cameron.
What makes a restraint clause enforceable?
A restraint clause is only considered enforceable if an employer can demonstrate that it is no more than what is necessary to protect its legitimate interests, and that its restrictions are reasonable regarding the interests of both parties, as well as the public interest.
The Court of Appeal considered three aspects of the restraint in determining whether it was unreasonable in this case – the nature of the restraint, the quantum of damages and the time restraint.
The nature of the restraint
To determine the nature of the clause, the Court of Appeal said it must be considered in the context of the agreement as a whole. The court found that in this case the clause did not prohibit Mr Money from working for clients or former clients of Bird Cameron. Rather it imposed a liability to pay damages to the firm if the clause is enlivened.
The parties agreed, and the trial judge accepted, that Bird Cameron had a “legitimate interest in protecting the goodwill which developed with its clients as a result of its employees performing accounting services”. This legitimate interest was its “customer connections” – that is, the attachment an employee develops with a client while providing the firm’s services to them.
As such, the Court of Appeal found that the clause placed “little restraint on Mr Money, while providing reasonable protection to Bird Cameron’s goodwill”.
The quantum of damages
While Mr Money had agreed during the trial that the damages of 75 cents in the dollar was a reasonable pre-estimate of the price to acquire a parcel of fees of an accounting practice, he argued in the appeal that applying it to a trainee as part of an employment agreement was “unconscionable or extravagant in its application”.
However, the Court of Appeal found that Mr Money did not establish that the liquidated damages were a penalty. The court was satisfied that the amount of damages was not unreasonable in the circumstances.
The time restraint
The third aspect the Court of Appeal considered was whether the three-year restraint period was unreasonable. The court found it was acceptable, as Bird Cameron was entitled to protection against Mr Money exploiting the goodwill he created for the firm’s benefit while providing services to its clients.
The court found that it was probable that Mr Money would retain a level of attachment to these clients for some years after ceasing to provide them with accounting services through Bird Cameron.
Implications for businesses
Courts have demonstrated they will regard restraint clauses as unenforceable if they are found to be unreasonable and contrary to the public interest. Therefore, a business wanting to protect its interests, such as client relationships and confidential information, through a restraint clause in an employment contract, must consider each element of the clause carefully to ensure it serves only to protect its legitimate interests.
This case demonstrates that courts will be prepared to enforce restraint clauses if they are drafted so that their provisions go no further than what is genuinely required to protect the company’s interests.
While restraint clauses are typically drafted into more senior practitioners’ employment contracts, this case shows that courts may uphold such clauses for more junior staff where they have formed client relationships of a “continuing and recurring” nature.
The case also suggests that employers, particularly professional service firms, should consider including liquidated damages in restraint clauses. However, care must be taken to ensure the clause is a genuine pre-estimate of loss, and not a penalty, which will be considered unenforceable.