The Victorian Court of Appeal has upheld a three year post-employment restraint prohibiting a junior employee from providing services to the former employer’s clients. In another decision, the Victorian Supreme Court has found that a 12 month post-employment restraint was unenforceable.
Implications for employers
When an employer is drafting a restraint clause in an employment contract, it is essential to take into account the specific interests the restraint clause is seeking to protect and the particular circumstances of the employee whom the employer seeks to restrain. It is crucial that the restraint is no broader than is necessary to protect those interests.
In addition, carefully drafted liquidated damages clauses may be incorporated into employment contracts to avoid the inconvenience and expense of proving loss or damage in the event of breach.
Birdanco Nominees Pty Ltd v Money
Mr Money was employed as a junior trainee accountant at Bird Cameron Chartered Accountants. His employment contract contained a post-employment restraint, prohibiting him from providing defined services to any client of Bird Cameron for whom he had provided services during the final three years of his employment. “Services” were defined as “the practice of chartered accountants, taxation agents, business advisers and activities of a related nature”. If breached, the clause required Mr Money to pay Bird Cameron liquidated damages equal to 75% of the fees incurred by the client for services rendered by Bird Cameron in the last full financial year.
Mr Money resigned from his employment with Bird Cameron and commenced part-time employment as a qualified accountant with the Szencorp group, who was a major client of Bird Cameron, and with accounting firm Benjamin King Money. The Szencorp group subsequently terminated its retainer with Bird Cameron and sought accounting services from Benjamin King Money. Bird Cameron commenced proceedings against Mr Money in the County Court for breach of the restraint of trade agreement, claiming the liquidated damages sum.
Decision at first instance
The County Court dismissed Bird Cameron’s claim. The Court held the restraint went far beyond what was reasonable to provide adequate protection to Bird Cameron’s legitimate business interests and could therefore not be justified. Furthermore, the Court held that given the wide circumstances in which a breach of the restraint clause might arise, the liquidated damages sum was not a genuine pre-estimate of Bird Cameron’s loss and damage.
Bird Cameron appealed.
Court of Appeal decision
The Victorian Court of Appeal upheld the terms of the restraint in Mr Money’s employment contract.
Did Mr Money provide the defined services to the client?
Mr Money argued the restraint was not enlivened because he was not providing the defined “Services” to the client as a qualified accountant. The Court disagreed, finding that the professional accounting services he provided under the supervision of a qualified accountant were sufficient to establish a relationship of client and accountant between him and the Szencorp group. The Court held that a “client connection” of a “continuing and recurring” kind existed between Mr Money and the Szencorp group such that the restraint clause was enlivened.
Did the restraint protect Bird Cameron’s legitimate interests?
The Court found that the customer or “trade” connection Bird Cameron had with those of its clients who dealt directly with Mr Money was a legitimate interest capable of contractual protection by way of restraint.
Was the restraint reasonable?
The Court held that the restraint was “relatively narrow,” being limited to those particular clients of Bird Cameron with whom Mr Money established a “continuing relationship”. The restraint did not prevent Mr Money from competing with his former employer, as Mr Money was permitted to service Bird Cameron’s clients, subject to paying the relevant liquidated damages sum. Furthermore, the Court found that three years is a reasonable time during which Bird Cameron was entitled to protection against Mr Money soliciting Bird Cameron clients.
Was the liquidated damages clause a penalty?
The Court held that in light of the narrow circumstances in which this restraint clause could be enlivened, the liquidated damages sum was a genuine pre-estimate of the loss likely to be suffered by Bird Cameron.
Having decided to uphold Bird Cameron’s appeal, the Court ordered Mr Money to pay damages, interest and Bird Cameron’s legal costs.
Wallis Nominees (Computing) Pty Ltd v Pickett
Mr Pickett was an IT specialist at Wallis Nominees (Computing) Pty Ltd (DWS). His employment contract contained a 12 month post-employment restraint seeking to prohibit him from providing services to any DWS client for whom he had provided specific services whilst in the employ of DWS.
Mr Pickett was contracted out to a DWS client to provide IT consultancy services on behalf of DWS on a full-time basis. The client subsequently offered Mr Picket a permanent position as IT Operations Manager. Mr Pickett accepted the role and resigned from his employment at DWS. DWS initiated proceedings in the Supreme Court, seeking a permanent injunction restraining Mr Pickett from working for DWS’ former client in reliance on the restraint clause in his contract..
Supreme Court decision
The Supreme Court held that the restraint of trade in Mr Pickett’s employment contract was void and unenforceable.
The Court held that the skills and experience Mr Pickett gained in the course of his employment did not constitute a legitimate business interest that DWS was entitled to protect by way of such a covenant. The nature, context and particular circumstances of the tripartite relationship between DWS, Mr Pickett and the client did not place Pickett in a special category that would create a risk of exploitation. Mr Picket was not intended to be the human face of DWS and his role did not include obtaining or extending the client base of DWS. DWS did not propose to develop goodwill around Mr Pickett and he was not placed in a position where he could exert control over the client’s custom “as a personal asset”.
The Court held that something more than mere exposure or interaction with the client by the employee is required to warrant contractual protection. A strong connection to the client must be established and this would include personal or special knowledge of the client and a significant degree of influence.
The Court held that even if, contrary to its opinion, DWS had a legitimate interest that the covenant sought to protect, the covenant provides greater protection than necessary in two respects:
- Mr Picket was prohibited from providing services to clients of DWS that he had been in contact with whilst employed by DWS but to whom he had not actually provided services. Such a relationship would not provide Mr Picket with an opportunity to form the necessary close connection with the client; and.
- the 12 month duration of the restraint was unreasonable as it would not take DWS 12 months to find an effective replacement employee who would be able to establish a relationship with the client.
Birdanco Nominees Pty Ltd v Money  VSCA 64
Wallis Nominees (Computing) Pty Ltd v Pickett  VSC 82