Stacks Taree v Marshall [No.2] [2010] NSWSC 77 (1 March 2010)

Last Updated: 16 July 2010

NEW SOUTH WALES SUPREME COURT

CITATION:
Stacks Taree v Marshall [No.2] [2010] NSWSC 77


JURISDICTION:
Equity Division

FILE NUMBER(S):
322946/09

HEARING DATE(S):
27/01/10 and 28/1/2010

JUDGMENT DATE:
1 March 2010

PARTIES:
Stacks/Taree Pty Limited (Plaintiff)
Anthony John Marshall (Defendant)

JUDGMENT OF:
McDougall J

LOWER COURT JURISDICTION:
Not Applicable

LOWER COURT FILE NUMBER(S):
Not Applicable

LOWER COURT JUDICIAL OFFICER:
Not Applicable



COUNSEL:
M K Condon (Plaintiff)
A R Moses SC / C N Bova (Defendant)

SOLICITORS:
Stacks/Taree (Plaintiff)
Marque Lawyers (Defendant)


CATCHWORDS:
EMPLOYMENT LAW –– employment contract - restraint of trade clause – application for injunctive relief by employer to prevent employee from working at another legal practice – restraints on solicitation and on competition – whether restraint on solicitation for twelve months offered sufficient protection for interest of employer – whether solicitation should be limited to clients for whom employee had undertaken legal work or include clients generally – validity of restraint on competition – relevant principles – public policy - Restraints of Trade Act 1976 (NSW)

LEGISLATION CITED:
Restraints of Trade Act 1976 (NSW)

CATEGORY:
Principal judgment

CASES CITED:
Adamson v New South Wales Rugby League Limited [1991] FCA 9; (1981) 27 FCR 535
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288
Attorney-General of Australia v Adelaide Steamship Co [1913] AC 781
Aussie Home Loans v X Inc Services [2005] NSWSC 285
Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; (2006) 71 NSWLR 9
Cream v Bushcolt Pty Ltd [2004] WASCA 82
Barrett v Ecco Personnel Pty Ltd [1998] NSWSC 30
Buckley v Tutty [1971] HCA 71; (1971) 125 CLR 353
Dawnay Day and Co Ltd v de Braconier d’Alphen [1997] EWCA Civ 1753; [1998] ICR 1068
Dewes v Fitch (1920) 2 Ch 159
Fitch v Dewes [1921] AC 158
Harlow Property Consultants Pty Ltd v Byford [2005] NSWSC 658
Herbert Morris Ltd v Saxelby [1916] 1AC 688
IRAF Pty Ltd v Graham [1982] 1 NSWLR 419
Kearney v Crepaldi & Ors [2006] NSWSC 23
Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564 (NSW Court of Appeal)
Koops Martin v Reeves [2006] NSWSC 449
Lindner v Murdock’s Garage [1950] HCA 48; (1950) 83 CLR 628
Linwar Securities Pty Ltd v Christopher Savage [2006] NSWSC 786
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] 1 AC 535
NE Perry Pty Ltd v Judge [2002] SASC 312; (2002) 84 SASR 86
North Western Salt Co Ltd v Electrolytic Alkali Co Ltd [1914] AC 46
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535
Orton v Melman (1981) 1 NSWLR 583
Rentokil Pty Ltd v Lee [1995] SASC 5318; (1995) 66 SASR 301
Stenhouse Australia Ltd v Phillips [1973] UKPC 1; [1974] AC 391
Woolworths Ltd v Olson [2004] NSWCA 372
Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317

TEXTS CITED:
Butterworths, 2nd edition, 1999

DECISION:
Those are the detailed reasons for the decision to dismiss the claim for injunctive relief given, pursuant to short reasons, on 28 January 2010.



JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION



McDOUGALL J

1 March 2010

2009/322946 STACKS / TAREE P/L v ANTHONY JOHN MARSHALL [No.2]

JUDGMENT

1 HIS HONOUR: The first plaintiff (Stacks Taree) is an incorporated legal practice. It carries on practice in Taree. The defendant (Mr Marshall) is a solicitor. He was employed by Stacks Taree pursuant to a written contract made in July 2004 (the contract). Mr Marshall resigned, and his employment ceased on 27 November 2009. He wishes to work for another legal practice in Taree, Paton Hooke Lawyers Pty Limited (Paton Hooke). Stacks Taree says that Mr Marshall cannot do so, at least without its consent. It relies on a restraint set out in cl 13 of the contract. It seeks final injunctive relief to enforce cl 13.

2 I heard these proceedings during the vacation. They were brought on in circumstances of urgency. At the conclusion of the hearing, I informed the parties that I had come to a clear view on the matter, and was in a position to make orders supported by brief reasons, on the basis that I would give detailed reasons at a later time. The parties agreed that I should do so. I ordered that the proceedings be dismissed with costs, and gave brief reasons for that ([2010] NSWSC 34]). These are my detailed reasons for disposing of the proceedings in that way.

The issues

3 To understand what seemed to be the fundamental issues in dispute, it is necessary to know that cl 13 comprises three elements, each with a duration of 12 months from cessation of employment:

(1) a restraint on solicitation of clients of Stacks Taree;

(2) a restraint on solicitation of employees of Stacks Taree and its related “Stacks” entities; and

(3) a restraint on “Competitive Activity” as defined.

4 It is also necessary to know that Mr Marshall offered, although without admissions, undertakings to the Court. One of those undertakings was equivalent to (2) above. The other was given in relation to (1) above, but was limited to a period of six months and to clients of Stacks Taree for whom Mr Marshall had performed legal work.

5 Bearing those matters in mind, the fundamental issues appeared to be:

(1) whether a restraint in relation to solicitation of clients, limited to a period of six months from cessation of employment, offered sufficient protection for the legitimate interest of Stacks Taree;

(2) whether it was a sufficient protection for those legitimate interests for the undertaking (or any order) in relation to solicitation of clients to be limited to clients of Stacks Taree for whom Mr Marshall had undertaken legal work, rather than clients generally; and

(3) whether, in addition, protection of those legitimate interests required as well a restraint on Competitive Activity as defined.

Relevant provisions of the contract

6 Clause 13 of the contract reads as follows:

13. Non-competition

13.1 Non-competition

From the date of termination of this Agreement for any reason, the Employee shall not, either solely or in association with another, for such periods as referred to in Item 10 of Schedule 1, whether as consultant, principal, agent, employee, director, shareholder, beneficiary or trustee do any of the following:

(a) solicit, procure or otherwise attempt to entice away from the Firm all or part of the custom of any person who during his employment with the Firm or at the date of termination of his employment was a Client of the Firm; or

(b) solicit, counsel or otherwise entice away any employee from the Firm, Stacks or any Stacks Group Member; or

(c) engage in Competitive Activity.

13.2 Intention of parties

It is the intention of the parties that the prohibitions and restrictions in this Clause 13 will apply and be enforceable unless a Court, in exercising its discretion, determines that the prohibition or restriction is an unreasonable restraint of trade.

7 The period of restraint is stated by item 10 of the schedule to the contract as being 12 months of termination from employment.

8 The “Firm” is Stacks Taree.

9 “Client of the Firm” is defined to mean:

“any person who is at the time of termination of this Agreement or who has been during the preceding one (1) year a client of the Firm.”

10 “Stacks” is the second plaintiff (Stacks TLF).

11 “Stacks Group Members” are law firms – effectively franchisees under the “Stacks” banner – that have entered into consultancy agreements with Stacks TLF.

12 “Competitive Activity” is defined to mean:

“any activity which involves carrying on either alone, as a director or in partnership with any person or persons or as an employee of any person or persons the business or profession of a lawyer within ten (10) kilometres of the post Offices at Taree or Wingham.”

Mr Marshall’s undertakings

13 Mr Marshall offered undertakings to the Court (as I have said, without admissions) in the following terms:

1. The defendant will not, from 27 November 2009 to 27 May 2010 (being a period of six months), either solely or in association with another (whether as consultant, principal, agent, employee, director, shareholder, beneficiary or trustee), solicit, procure or attempt to entice away from the plaintiff any person or entity for whom the defendant worked as an employee of the plaintiff during the preceding period of 12 months, namely 27 November 2008 to 27 November 2009.

2. The defendant will not, from 27 November 2009 to 27 November 2010 (being a period of 12 months), either solely or in association with another (whether as consultant, principal, agent employee, director, shareholder, beneficiary or trustee), solicit, procure or attempt to entice away from the plaintiff, any employee of any law firm which has entered into a Consultancy Agreement with Stacks/The Law Firm Pty Limited.

The Court makes the following orders:

1. The Amended Summons filed by the Plaintiff is dismissed.

2. The plaintiff pay the costs of the Defendant.

History of the Stacks franchise

14 Stacks Taree and its predecessors have practised in the area of Taree and Wingham since 1931. The practice was commenced in Wingham by Mr Edward Raymond Stack. His sons Mr Raymond Thomas (Ray) Stack, Mr David Maurice (Maurie) Stack and Mr Timothy John (Tim) Stack joined the firm, which at some stage changed its name to “Stacks / The Law Firm”. The Taree office opened in 1966. The firm opened what were called branch offices under the name Stacks / The Law Firm, but those branch offices were in fact separate partnerships. The partnerships were incorporated when it became possible to do so. There is now a number of “Stacks” legal practices, operating under the banner of Stacks / The Law Firm. Stacks TLF has a consultancy agreement with each separate incorporated legal practice. Mr Tim Stack said that “[t]he arrangements amount to a franchise”. He said also that “[i]n the result, my family has effectively carried on legal practice in the local area since 1931 and in Taree since 1966”.

15 It is not in dispute that the brothers Stack have worked tirelessly to promote the practice of Stacks Taree and its predecessors. Mr Tim Stack gave detailed evidence of steps taken “to build up and develop our legal practice.” He and his brothers were active in the affairs of the Taree community, and in particular in various business commercial associations. They have built up an extensive network of contacts from whom the firm derives, and in the past derived, work.

Mr Marshall becomes an employee of Stacks Taree

16 There was a substantial body of evidence devoted to the negotiations leading up to the making of the contract in July 2004. In the result, the parties’ submissions did not focus in detail on that evidence, and accordingly I shall not burden the reader of these reasons with detailed findings.

17 Prior to July 2004, Mr Marshall was employed by Allens Arthur Robinson (AAR). His areas of practice included general commercial work, local government and intellectual property. Mr Tim Stack had a commercial practice, comprising principally commercial conveyancing (leasing and sale and purchase of commercial real estate), the sale and purchase of businesses and general commercial advice work. For reasons that it is unnecessary to recount, he needed someone to take some of the burden of his work from him. Mr Grant Edward Avery, a director of Stacks Taree who knew Mr Marshall, approached Mr Marshall to see if he would be interested in moving to Taree.

18 There is no doubt that Stacks Taree was keen to obtain Mr Marshall as an employee. His background at AAR was regarded as a significant “selling point” within the Taree business community. There is no doubt that Stacks Taree, and Messrs Maurie and Tim Stack individually, offered substantial inducements to Mr Marshall to leave AAR and move to Taree with his family. It is common ground that Mr Marshall was told, in the course of negotiations, that there was open to him the prospect of becoming a director of Stacks Taree, with in due course a shareholding in the company that would entitle him to a share of profits.

19 There was a question as to the extent to which events after July 2004 were relevant to the assessment of the reasonableness of cl 13 of the contract. As I conclude at [46(1)] below, it may be legitimate to have regard to events that occurred after the contract was made, at least to the extent those events were foreseen or foreseeable at the time the contract was made. Accordingly, I find (and it was scarcely in dispute) that:

(1) Stacks Taree and Mr Marshall each understood that Mr Marshall’s experience and background at AAR would be used to market his services to the business community in Taree;

(2) Stacks Taree and Mr Marshall each understood that Stacks Taree, in particular through Mr Tim Stack, would introduce Mr Marshall both to Mr Tim Stack’s existing clients and to the Taree business community generally;

(3) Stacks Taree and Mr Marshall each expected that, through this process of introduction, Mr Marshall would be able not only to perform work for Mr Tim Stack’s existing clients but also to build up his own client base from within the Taree business community; and

(4) Mr Marshall could legitimately hope to be made a director of Stacks Taree, and to be issued shares in the company, if he performed his duties to the reasonable satisfaction of the existing directors and shareholders and was able to demonstrate that he would contribute to the prosperity and growth of the company.

20 As I have said, the contract was signed in July 2004. There was some question in the evidence as to who was responsible for the production of the draft. The better view of the evidence is that Stacks Taree proffered a standard form of contract to Mr Marshall, and that Mr Marshall offered “to revise it so as to [put] it into a more professional format”. Although it was suggested at one stage that Mr Marshall had drafted the contract, I do not think that he made – at least knowingly – any changes of substance.

21 Mr Marshall did not seek independent legal advice as to the terms of the contract or their enforceability. He said that he had had no experience in employment law, and did not have any understanding of whether cl 13 was enforceable in whole or in part.

22 Mr Maurie Stack said that the standard form of contract that Mr Marshall revised included a restraint on solicitors who left the firm’s employ from acting for former clients of the firm for a defined period. There is no equivalent of that in the contract. Mr Maurie Stack said, perhaps somewhat surprisingly, “that this deletion may have occurred by error” and that he “did not pick it up at the time”. There was no application for rectification of the contract, nor was it suggested that the deletion (if there was one) was anything but erroneous.

Mr Marshall’s involvement in the practice of Stacks Taree

23 Mr Tim Stack worked actively to refer his own clients to Mr Marshall, and to introduce Mr Marshall to the business community in Taree. He also introduced Mr Marshall to councillors and officers of the Greater Taree City Council, an important client of Stacks Taree. Mr Tim Stack endeavoured to assist Mr Marshall to build up his own practice, both from clients of Mr Tim Stack and from new clients.

24 Stacks Taree took steps to promote Mr Marshall’s qualifications and experience. The firm advertised regularly in the local newspaper, and in addition contributed a column to every issue. The various lawyers working for Stacks Taree were featured in the advertisements, on a rotating basis. An advertisement with Mr Marshall’s photograph and a description of his areas of practice appeared every 10 to 12 weeks.

25 Although Mr Marshall was, as a matter of law, an employed solicitor (and remains so for the whole of his employment, notwithstanding his appointment to the position of “Associate” on 1 July 2006), the overwhelming impression from the evidence is that he was promoted as one might expect for a senior and responsible lawyer. In short, he was promoted as someone who would accept instructions, and provide legal services, independently, and not merely as an assistant to, and under the direction and supervision of, Mr Tim Stack or any other director of Stacks Taree.

26 In my view, that is precisely what the parties had in contemplation when the employment contract was made. The position offered to Mr Marshall was a senior position, and his services would be (and were) promoted to the local community accordingly.

Mr Marshall’s resignation and subsequent events

27 There was a considerable body of evidence directed to the circumstances leading up to Mr Marshall’s resignation. In the result, nothing turns on those circumstances and it is unnecessary to deal with the evidence. It is sufficient to record that in about August 2009, Mr Marshall decided to leave the employ of Stacks Taree. He tendered his resignation by letter dated 31 August 2009. The resignation was to be effective from 27 November 2009. On 9 September 2009, Mr Maurie Stack sent an email to Mr Marshall. That email said, among other things, that “we would like to keep doors opened either to your continued or future association with Stacks The Law Firm”. The email proposed that Mr Marshall might wish to open a “Stacks” franchise in Coffs Harbour, in conjunction with a local practitioner, Mr Tony Walsh. Mr Marshall did not pursue that opportunity.

28 On 8 October 2009, Mr Marshall sent an email to the directors of Stacks Taree. He said that he was “in process of working through a number of opportunities, including local opportunities... working as a solicitor”. The email stated:

“I am obviously aware of the restraint provisions set out in my contract of employment and although I have formed my own view (and as advised) in relation to certain aspects of the restraint, I would appreciate it if the directors would confirm the firms [sic] position in relation to my working as a solicitor within Taree and Wingham from January next year. Obviously I am more than prepared to abide by total restraint for 12 months so far as it relates to current clients of the firm and the firms [sic] staff.”

29 In context, the last sentence that I have set out should be read as referring to the restraints set out in cl 13.1(a) and (b) of the contract. No one suggested otherwise.

30 Mr Justin Stack, the managing director of Stacks Taree, replied saying that “[o]ur position is that the non-competition clause of your employment contract prohibits it and any breach would result in immediate enforcement action”. Thereafter, Mr Marshall had discussions with Mr James Paton of Paton Hooke. He spoke to Mr Tim Stack. Mr Stack said that he offered to see if “some sort of compromise” could be negotiated. That compromise might involve “an arrangement whereby the firm made a payment to you and you not work as a lawyer in Taree for four to six months beyond February”. (According to Mr Stack, Mr Marshall had said that he did not propose to work in December 2009 or January 2010 “but from February I will have to work for financial reasons”.)

31 In the event, Mr Marshall accepted an offer of employment by Paton Hooke. That firm carries on business in Taree. Its offices are located about 550 metres from the offices of Stacks Taree.

Mr Marshall’s replacement

32 Stacks Taree has employed a solicitor, Mr David Phoon, to replace Mr Marshall. Mr Tim Stack gave evidence (the relevance of which was disputed) that:

(1) 12 months was the “minimum time for [Stacks Taree] to have any realistic chance of introducing David to [its] commercial clients as Tony’s replacement”; and

(2) it would take of the order of two to three years for Mr Phoon “to become well known in the local business community”.

33 As to the former of those matters, Mr Tim Stack said that Mr Phoon was employed on probation for a period of three months. Further, he said, he and Mr Phoon would see clients jointly, “at least in relation to any substantial commercial matters”, for the first six to twelve months.

The area of restraint

34 It will be observed from the definition of “Competitive Activity” that cl 13.1(c) prohibits work within two circular areas: a circle having a radius of 10 kilometres based on the post office at Taree, and a circle having a radius of 10 kilometres based on the post office at Wingham. According to a map that was tendered, the first of those circles does not quite reach to Wingham, from which I deduce that Wingham is a little more than 10 kilometres from the post office of Taree “as the crow flies” (Mr Tim Stack said that it was approximately 15 kilometres distant by road). Wingham lies to the north-west of Taree. There is thus a substantial overlap between the two circles; but, nonetheless, the second circle extends very substantially the geographic area of restraint limited by the first.

35 The first circle includes not only Taree but Taree South and Purfleet, which I understand to be in effect part of the greater Taree metropolis; and Chatham and Cundletown to the east, which Mr Tim Stack said “in effect form one town with Taree.”

36 Mr Tim Stack’s evidence was that the great bulk of his clients came from the Taree business community. It is not clear whether, by this, he intended to refer to clients who had their places of business within the greater Taree metropolis as I have just described it.

37 Mr Tim Stack said also that Stacks Taree had not had an office in Wingham since 1995, but that the two real estate agents there “have both remained supporters of our office”. He said that real estate agents are an important source of work in country towns. There was no other evidence of any commercial relationship between businesses in or around Wingham and the practice of Stacks Taree in general, or of Mr Tim Stack in particular.

The applicable legal principles

38 A consideration of contracts in restraint of trade requires recognition of two competing principles. The first is the principle that contracts freely negotiated should be given effect according to their terms, at least in the absence of any vitiating element. The second is the public interest in competition and, more generally, in the promotion of economic efficiency and growth that are said to be concomitants of effective competition. The two principles collide where a clause in a freely negotiated contract seeks to restrain the ability of one of the parties to that contract to compete with the other in defined circumstances.

39 At common law, a contract or covenant against competition is void. It would be upheld only to the extent that it was given and taken to protect a legitimate interest of the covenantee, and went no further than was reasonably required to achieve that end. As Lord Atkinson said in Herbert Morris Ltd v Saxelby [1916] 1AC 688 at 701-2:

“In all cases such as this, one has to ask oneself what are the interests of the employer that are to be protected and against what he is entitled to have them protected. He is undoubtedly entitled to have his interest in his trade secrets protected... . And that protection may be secured by restraining the employee from divulging these secrets or putting them to his own use. He is also entitled not to have his old customers by solicitation or by some other means enticed away from him. But freedom from all competition per se apart from both of those things, however lucrative it might be to him, he is not entitled to be protected against. He must be prepared to encounter that even at the hands of a former employee.”

40 Lord Parker said at 710:

“[t]he reason, and the only reason, for upholding such a restraint on the part of an employee is that the employer has some proprietary right, whether in the nature of trade connection or in the nature of trade secrets, for the protection of which such a restraint is – having regard to the duties of the employee – reasonably necessary. Such a restraint has, so far as I know, never been upheld, if directed only to the prevention of competition or against the use of the personal skill and knowledge acquired by the employee in his employer’s business.”

41 In summary, at common law, restraints of trade (including both restraints against competition and restraints on solicitation of customers) may be upheld where they are reasonably necessary to prevent disclosure of confidential information obtained by the former employee in the course of employment, or the exploitation of a connection built up by that employee with the former employer’s customers in the course of that employment. Again at common law, the onus of showing that a contract in restraint of trade is reasonable as between the parties lies on the party alleging that this is so. See Viscount Haldane LC in North Western Salt Co Ltd v Electrolytic Alkali Co Ltd [1914] AC 461 at 470. Likewise, at common law, the onus of showing that a contract in restraint of trade is injurious to the public interest lies on the party alleging that this is so. See the advice of the Privy Council in Attorney-General of Australia v Adelaide Steamship Co [1913] AC 781 at 797.

42 In New South Wales, the position that I have just stated is affected by the Restraints of Trade Act 1976 (NSW). By s 4(1) of that Act, a restraint of trade is said to be valid to the extent to which it is not against public policy. The effect of s 4(1) appears to be to reverse the common law presumption of invalidity.

43 Further, it is necessary to bear in mind s 4(3) of the Act, which enables the Court to read down a restraint of trade in certain circumstances:

(3) Where, on application by a person subject to the restraint, it appears to the Supreme Court that a restraint of trade is, as regards its application to the applicant, against public policy to any extent by reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint, the Court, having regard to the circumstances in which the restraint was created, may, on such terms as the Court thinks fit, order that the restraint be, as regards its application to the applicant, altogether invalid or valid to such extent only (not exceeding the extent to which the restraint is not against public policy) as the Court thinks fit and any such order shall, notwithstanding sub-section (1), have effect on and from such date (not being a date earlier than the date on which the order was made) as is specified in the order.

44 Mr Moses of Senior Counsel, who appeared with Mr Bova of counsel for Mr Marshall, stated the principles relevant to this case as follows:

3. RELEVANT PRINCIPLES

The principles relevant to the validity of restraint of trade clauses are as follows:

(a) At common law, a restraint of trade is contrary to public policy and void, unless it can be shown that the restraint is, in the circumstances of the particular case, reasonable: Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] 1 AC 535 at 565; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288 at 315.

(b) In New South Wales, it is not strictly correct that a restraint is prima facie void; a restraint is valid to the extent to which it is not against public policy, even if not in severable terms: Restraints of Trade Act (NSW), section 4(1): see Koops Martin v Reeves [2006] NSWSC 449 at [27] per Brereton J.

(c) The onus at common law of showing that the restraint goes no further than is reasonably necessary to protect the interests of the person in whose favour the restraint operates, lies on the party seeking to support the restraint as reasonable: Adamson v New South Wales Rugby League Limited [1991] FCA 9; (1981) 27 FCR 535 at 554 per Hill J and North Western Salt Co Ltd v Electrolytic Alkali Co Ltd [1914] AC 461 at 470 per Viscount Haldane LC.

(d) The onus of establishing that a contract in restraint of trade is injurious to the public interest lies on the party alleging that this is so: see for example Attorney General of Australia v Adelaide Steamship Co Ltd [1913] AC 781 at 797.

(e) The Court gives considerable weight to what parties have negotiated and embodied in their contracts, but a contractual concensus cannot be regarded as conclusive, even where there is a contractual admission as to reasonableness: see Woolworths Ltd v Olson [2004] NSWCA 372 at [39].

(f) The validity of the restraint is to be tested at the time of entering into the contract and by reference to what the restraint entitled or required the parties to do rather than what they intend to do or have actually done: see Woolworths Ltd v Olson [2004] NSWCA 372 at [40].

(g) The test of reasonableness is measured by reference to the interests of the parties concerned and the interests of the public: Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535. The requirement that the restraint be reasonable in the interests of the parties means that the restraint must afford no more than adequate protection to the party in whose favour it is imposed: Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 707; Buckley v Tutty [1971] HCA 71; (1971) 125 CLR 353 at 376; Linwar Securities Pty Ltd v Christopher Savage [2006] NSWSC 786 at [25] and [26] per Nicholas J; and Koops v Martin v Reeves [2006] NSWSC 449 at [28] per Brereton J.

(h) An employer is not entitled to require protection against mere competition: Dewes v Fitch (1920) 2 Ch 159 at 181; Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 329 per

Gleeson CJ. Covenants that restrain competition are

invalidunless they are reasonably necessary to protect legitimate business interests: see for example Harlow Property Consultants Pty Ltd v Byford [2005] NSWSC 658 at [24] and [25] per White J.

(i) An employer is entitled to protection against the use by the employee of knowledge obtained by him of his employer's affairs in the ordinary course of trade: Dewes v Fitch (1920) 2 Ch 159 at 181. A restraint clause will be invalid unless it is necessary to prevent disclosure of trade secrets or use of a connexion built up by the employee with customers: JD Heydon, The Restraint of Trade Doctrine (Butterworths, 2^nd edition, 1999) at 66; Aussie Home Loans v X Inc Services [2005] NSWSC 285 at [14] per White J.

(j) The relevant knowledge must be more than simply the skill and knowledge necessary to equip the employee as a possible competitor in the trade, but the obtaining of personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer's trade secrets as would enable him to take advantage of his employer's trade connection or utilise information confidentially obtained: Dewes v Fitch (1920) 2 Ch 159 at 181.

(k) An employer’s customer connection is an interest which can support a reasonable restraint of trade, but only if the employee has become, vis-a-vis the client, the human face of the business, namely the person who represents the business to the customer: see for example Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; (2006) 71 NSWLR 9 at [25] per Brereton J; and Kearney v Crepaldi & Ors [2006] NSWSC 23 at [51] to [53] per McDougall J.

(l) The effect of the Restraints of Trade Act 1976 (NSW) is to allow the restraint to be read down so as to be valid to the extent necessary only to capture the conduct of the defendant, if that extent would have been valid. However, the Act does not allow the Court to remake the contract or a covenant in the contract: Orton v Melman (1981) 1 NSWLR 583; Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 329; Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564 (NSW Court of Appeal) at 43,833. Whilst the Court is permitted to read down the clause if the clause is so capable, it cannot be re-drafted: Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564 (NSW Court of Appeal) at 43,833; Woolworths v Olson [2004] NSWCA 372.

45 Mr Condon of counsel, who appeared for Stacks Taree, accepted that, with some qualifications, Mr Moses’ statement of the principles was correct.

46 The qualifications were:

(1) as to (f) and (g): Mr Condon submitted that the inquiry could extend to potential, or at least foreseeable, developments in the role of the employee and the nature of the employer’s business. He relied on what Brereton J had said in Koops at [53]:

[53] The validity of a restraint is judged at the time at which the contract is made, and having regard to what it entitled or requires the parties to do as distinct from what they intend to do or have actually done [Nordenfelt, 574; Commercial Plastic Limited v Vincent [1964] 3 WLR 820, 829; Heydon, pp 37-40; Galbally, [117]; Lindner v Murdochs Garage; Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337, 344; Woolworths Limited v Olsen, 372 [40]]. As the parties have to turn their minds as to what is reasonable at the time when the restraint is created, some allowance must be made for potential developments in the role of the employee and the nature of the business for which he or she might be responsible in the future. Reasonableness does not require precise concordance between the restraint and what might ultimately be seen as the employer’s legitimate interest; it is accepted that a reasonable covenant might on the one hand not totally protect the employer in one respect, and on the other go somewhat further than is necessary for legitimate protection, without ceasing to be reasonable [Coote v Sproule, 580-581].

I accept that this qualification is correct.

(2) As to (k): Mr Condon submitted that an employee would typically be found to be the human face of a business where the business is in fact the conduct of a profession, and where the employee is a professional who provides confidential services to the clients of the business. He relied on what Brereton J had said Koops at [35]:

[35] Typically, that will be the case where the employee is a professional who has confidential dealings with those clients of the firm with whom he or she deals. Although it always depends on the particular facts, a particular solicitor, accountant, or doctor with whom a client deals may well, from the perspective of the client, be for all practical purposes the person whose advice they seek, and thus the persona of the firm.

I accept that qualification, at least at the level of principle, or as a guide to the fact-finding exercise.

47 It is appropriate, having regard to the submissions that were put, to look in a little more detail at some of the decisions on which counsel relied.

48 Mr Condon relied on the decision of the House of Lords in Fitch v Dewes [1921] AC 158 (on appeal from the decision of the Court of Appeal referred to at (j)) of Mr Moses’ statement of the relevant principles). The appellant had been employed by the respondent as, successively, a junior clerk, articled clerk and managing clerk over a period of 15 years. The respondent practised as a solicitor at Tamworth in Warwickshire. The appellant’s employment as managing clerk was regulated by a contract, cl 8 of which provided that the appellant would not at the end of his employment “either alone or jointly with any other person or persons directly or indirectly be engaged or manage or concerned in the office profession or business of a solicitor within a radius of 7 miles of the Town Hall of Tamworth”. There was an exception of no present relevance. Clause 8 was unlimited as to time.

49 The leading speech was given by Lord Birkenhead LC. His Lordship said at 163 that there were two relevant considerations:

(1) was the clause against the public interest? and

(2) did what had been stipulated for exceed what was required for the protection of the covenantee, or alternatively for the protection of both parties?

50 His Lordship concluded at 164 that the respondent (covenantee) had a legitimate interest to protect. As the Lord Chancellor put it:

“He is the founder, or at least the possessor, of the business of an attorney. Such a business depends upon the existence of good will; upon the association and the intimacy which exist between him who carries on that business and the clients of the firm, and intimacy founded upon many complex considerations not easily to be defined, but very easily to be understood. Such a covenantee is taking into his employment in his firm a young man in circumstances which make it certain that the latter will acquire a close personal acquaintance with the clients from whom, and from whom alone, the business of the firm arises.”

51 Thus, his Lordship said at 165, the respondent had a legitimate interest in ensuring that his business should remain his, and that on termination of the appellant’s employment “the latter should not be in a position to use the intimacies and the knowledge which he had acquired in the course of his employment in order to create a practice of his own in that same place and by doing so undermine the business and the connection of the respondent”.

52 Viscount Cave spoke to similar effect at 168 – 169:

“Here the practice to be protected is that of a solicitor, to which a goodwill is no doubt attached. It is manifest that a person employed in such a practice as managing clerk must in the course of his duties acquire a knowledge of the affairs, the documents and the disposition of the clients of the business such as to give him a special equipment which he could, if not restrained by contract, use in obtaining employment as their legal adviser and that in this manner the goodwill of the employer might be impaired and perhaps destroyed. Now the object being to protect the employer’s business against the use of that special advantage, was it unreasonable to extend this covenant to the life of the employee? I think not.”

53 I accept that the decision – in particular, the speech of Lord Birkenhead – identifies the principles and the relevant considerations of fact. I accept, too, their Lordships’ reasoning process. But I have to say that I have some doubt as to whether the case would be decided in the same way today – at least, in this country. Competition law has moved a long way in the 90 -odd years since the dispute between Messrs Dewes and Fitch came before the courts. It might now be thought appropriate to give greater recognition to the public interest in ensuring competition, and hence efficiency, in the market for the provision of legal services.

54 There can of course be a problem with excessive reliance on decided cases. The question of validity of a covenant in restraint of trade (including, in this, a covenant against solicitation of the covenantee’s customers or clients) is not really a question of law. Decided cases state the relevant principles, and may provide useful, indeed valuable, guidance as to their application in particular factual circumstances. But the validity of a covenant in restraint of trade is to be assessed having regard to the terms of the particular covenant and the facts of the particular case. See Evans LJ, with whom Nourse and Ward LJJ agreed, in Dawnay Day and Co Ltd v de Braconier d’Alphen [1997] EWCA Civ 1753; [1998] ICR 1068 at 1111 – 1112.

55 Mr Condon laid stress on the judgments of members of the High Court of Australia in Lindner v Murdock’s Garage [1950] HCA 48; (1950) 83 CLR 628. The respondent conducted a garage business at two towns in South Australia. It employed the appellant as a mechanic. The appellant agreed, among other things, that he would not:

“during his employment or within one year from the termination thereof in any way carry on or be engaged concerned or interested either personally or as a partner or as a servant or employee of any other person or company in the business of garage proprietors, motor and general engineers... or any other similar business now and hereafter carried on by the employers within the same area... nor in any way interfere with the employer’s customers nor solicit their custom...”.

56 In short, the appellant agreed both not to compete with the respondent and not to solicit its customers: a combination of restraints, Mr Condon submitted, not unlike those contained in cl 13.1 of the contract.

57 The High Court held, by majority, that the covenant was void because the geographical area of the restraint was wider than was reasonably necessary for the protection of the respondent’s business. Latham CJ, who dissented in the result but whose statement of the principles was accepted by Webb J (at 647), explained why it was that an employer might reasonably require both a covenant against solicitation of customers and a covenant not to compete. His Honour said at 636 that an employee whose position brought him into close and personal contact with customers of the business might:

“establish personal relations with them of such a character that if he leaves his employment he may be able to take away from his former employer some of his customers and thereby substantially affect the proprietary interest of that employer in the goodwill of the business”.

58 Thus, his Honour said, “a covenant preventing him from accepting employment in a position in which he would be able to use in his own advantage and to the disadvantage of his former employer the knowledge and intimacy with the customers which he obtained in the course of his employment should, in the absence of some other element which makes it invalid, be held to be valid”. It was necessary, as his Honour pointed out, that each case should be considered “in relation to its own circumstances”.

59 At 637, his Honour said that the agreement to protect the employer’s interests:

“need not take the form of a covenant against solicitation. Such a covenant is difficult to enforce; it is difficult to show breach and difficult to frame an injunction. The master is entitled to protect himself by a covenant against competition, provided that it is not wider than is reasonably necessary to safeguard his proprietary interest against unfair use by the former servant of information gained during the service...”.

60 McTiernan J, who was one of the majority, pointed out at 643 the public interest in some contracts in restraint of trade. His Honour said that if the law discouraged such agreements, employers would be very wary of engaging employees in what his Honour called a “confidential... capacity”. I note, in passing, that a similar public interest was identified by the Lord Chancellor in Fitch at 165.

61 What Latham CJ said, as to the ability of an employer to protect itself by taking both a covenant against solicitation of customers and a covenant against competition, was picked up (without citation) by Doyle CJ in Rentokil Pty Ltd v Lee [1995] SASC 5318; (1995) 66 SASR 301 at 304. His Honour said that an employer who has a protectable interest in goodwill or customer connection may protect itself both by a covenant against solicitation and by a covenant against competition. It was “well established”, his Honour said, “that an employer may restrain a former employee from engaging in a business when to do so is likely to present an opportunity to behave in a manner which would infringe upon or damage the employer’s protectable interest”.

62 However, it is not in every case that the court will uphold both a covenant against solicitation and a covenant against competition. That situation was considered by the Privy Council in Stenhouse Australia Ltd v Phillips [1973] UKPC 1; [1974] AC 391. Their Lordships’ opinion was stated by Lord Wilberforce. His Lordship said at 403 that, in assessing the validity of a covenant against competition, it was relevant “that some protection has already been provided for the employer by the non-solicitation clause... . The presence of one restraint diminishes the need for others, or at least increases the burden of those who must justify those others”.

63 It follows from those decisions that, where an agreement contains both a non-solicitation clause and a covenant not to compete, the reasonableness of the latter must be assessed by reference to the adequacy of the protection, for the legitimate interests of the covenantee, offered by the former. It will only be if the former does not provide adequate protection for the legitimate interests of the covenantee that the latter may be upheld. That assessment, although guided by statements of principle in decided cases and learned writings, requires close scrutiny of the particular facts of the case.

64 If it is found that the non-solicitation clause does offer sufficient protection, then it is likely that the covenant not to compete would be struck down. That is because, to adapt the words of Lord Atkinson in Herbert Morris at 702, it would be a covenant against “all competition per se”; and, in the particular circumstances, incapable of justification by reference to the legitimate interests of the covenantee.

65 If, however, it is found that the covenant not to compete should not be struck down because the nonsolicitation clause does not offer sufficient protection for the relevant interests, then the covenant not to complete is valid as between the parties. In those circumstances, as was pointed in, The Restraint of Trade Doctrine at 184, it would be unusual for the covenant in restraint of trade nonetheless to be struck down as against the public interest.

66 The last question of principle concerns the approach to be taken in assessing the reasonableness of the duration of a restraint (either on solicitation or on competition). That question needs consideration because the submissions, and much of the evidence, for Stacks Taree addressed the length of time that it would take to introduce Mr Phoon to Mr Tim Stack’s clients and to promote him to the local business community, in the same way that Mr Marshall had been introduced and promoted. Mr Moses submitted that this was not the correct approach; and that the correct approach required consideration of the time that it would take to sever the relationship built up between Mr Marshall and the clients for whom he had worked.

67 For present purposes, the starting point may be taken to be the decision of Rath J in IRAF Pty Ltd v Graham [1982] 1 NSWLR 419. That case concerned a restraint in a contract of sale of a hairdressing salon. By that restraint, the vendor and his associates agreed that they would not for a period of three years from completion, and within a radius from one kilometre from the location of the business sold, be engaged directly or indirectly in the business of a hairdresser.

68 Rath J held that some aspects of the restraint were too wide, but that they could be read down by reference to s 4(3) of the Restraints of Trade Act.

69 His Honour dealt with the duration of the restraint at 428-429. At 429, he said that the most important consideration, in considering the reasonableness of the duration of the restraint, was “the time required for severing the relationship between the defendant [vendor] and those clients who would patronize the business after its sale”. There was, as his Honour said, “necessarily a large element of conjecture involved here”. It followed, his Honour said, that “considerable weight should attach to the period the parties themselves have selected”.

70 His Honour’s approach of considering the time taken to sever the covenantor’s connection with the customers or clients in question rather than the time for the covenantee to build up (or rebuild) a connection, was followed by the Full Court of the Supreme Court of South Australia in NE Perry Pty Ltd v Judge [2002] SASC 312; (2002) 84 SASR 86. See Doyle CJ at 91 [28] – [30], Bleby J at 96 [63] and Besanko J at 103 [101] – [104]. Besanko J explained the reason for this approach at 103 [100], by reference to the judgment of Kitto J in Lindner at 654. Besanko J said that the interest being protected was the purchaser’s interest in its business connection: preventing that connection from being affected by the personal knowledge and influence over the customers of the business which the vendor might have. (In fact, and of more relevance to this case, Kitto J put the matter in terms of a covenant given by an employee, and referred to knowledge and influence gained by the employee in the course of employment.)

71 Again, in Cream v Bushcolt Pty Ltd [2004] WASCA 82, the Full Court of the Supreme Court of Western Australia observed “that the most important consideration is the time required for severing the relationship between the vendor and those clients who would patronise the business after the sale”. See Malcolm CJ (with whom Miller and McKechnie JJ agreed) at [53].

72 Of course, as Doyle CJ pointed out in Perry at 91 [31], there may be little practical difference between the two approaches. Nonetheless, his Honour said, “it is safer to focus on the period of time reasonably required to break the connection... rather than the period of time within which there would be an opportunity for [the employee] to establish a new connection.”

73 Brereton J adverted to this question in Koops at [88], in a passage on which Mr Condon relied. His Honour there said that

“[g]enerally, the test of reasonableness for the duration of... a restraint... depends on how long it would take a reasonably competent replacement employee to show his or her effectiveness and establish a rapport with customers... . A related albeit subsidiary consideration is how long might the hold of the former employee over the clientele be expected to last before weakening”.

74 It does not appear that his Honour was referred to the decision of Rath J in IRAF, or to the Full Court decisions that I have cited. In circumstances where there is some conflict in the approach taken by two judges at first instance in this Court (Rath J in IRAF and Brereton J in Koops), I think that it is open to me to consider the matter for myself. I prefer the approach of Rath J in IRAF, and I take into account that it has commanded the support of two intermediate appellate courts. Further, for the reasons given by Besanko J in Perry (see at [70] above), I think that the approach taken by Rath J and by the Full Courts of the Supreme Courts of South Australia and Western Australia accords with the principle on which restraints on trade are enforced.

First issue: duration of the restraint against solicitation

75 Although the issues refer to three separate controversies arising out of cl 13, that clause requires consideration in its totality. Many of the points raised in respect of (for example) the duration of the restraint imposed by cl 13.1(a) apply also to the question of whether that restraint should apply to all clients or only those for whom Mr Marshall had worked, and to the validity of the restraint under cl 13.1(c). Again, although aspects of Mr Tim Stack’s evidence were said to relate to particular aspects of the restraint, substantial parts of that evidence were relied upon in submissions as bearing on the validity of the restraints generally. Accordingly, before turning specifically to submissions in respect of the first issue, I shall review the way in which the case for Stacks Taree was put and the salient aspects of Mr Tim Stack’s evidence on which general reliance was placed.

The plaintiff’s case

76 Mr Condon relied on a proposition derived from the judgment of Brereton J in Koops at [44]. His Honour there said that a more robust view of a restraint would be taken where the employee’s role includes obtaining and extending the custom of the employer’s business. That was so, his Honour said, because “in such circumstances the employer is entitled to protection against the employee taking advantage of the period of service to prepare for later competition”. It was also intended to prevent the employee’s exploitation, after termination of the employment, of customer connection established by the employee at the expense of the employer and for the benefit of the employer.

77 Mr Condon submitted that Mr Marshall had gone to Stacks Taree as a senior employee, who had prospects of advancement to the position of a director holding equity in the firm. He submitted further that Stacks Taree had invested substantial time and effort in promoting Mr Marshall to its clients and to the business community of Taree generally; and that the parties should be taken to have intended and understood, when the contract of employment was made, that this would happen. I accept those submissions. In my view, they state accurately the effect of the relevant evidence (and see at [23] to [26] above).

78 Mr Condon submitted further that Mr Marshall had become a “human face” of the business of Stacks Taree. I think that this is correct, in the sense that Mr Marshall was promoted to Taree, through the local press and otherwise, as one of the practitioners at Stacks Taree who would provide advice on commercial law and other matters (see, again, at [23] to [26] above). Mr Condon submitted that Mr Marshall had accepted this proposition. I am not quite sure that he did so (T31.48-32.8):

Q. And can I suggest that you appreciated that it was a significant selling point, if I can use that term, for the plaintiff that it retain someone of your calibre and your background, that is coming from a prestigious Sydney law firm?

A. Yes.

Q. And did you appreciate at the time that your background and expertise represented a significant selling point for the plaintiff in its business?

A. Yes.

Q. Not only in relation to the commercial work you performed, I suggest, but in relation to its practice generally; is that right?

A. I would assume so.

As Mr Condon submitted, Mr Marshall accepted that he expected, when he joined Stacks Taree, that he would have to “market” it to potential clients, not only if he became a director but also if he “were simply an employed lawyer” (T31.21-.32). In this context, he accepted, his background and experience “was a significant selling point” (T31.34-46).

The relevant evidence

79 Mr Tim Stack’s evidence was that, after Mr Marshall had been working for Stacks Taree for about 18 months, clients began (usually but not always at Mr Tim Stack’s request) to give instructions to Mr Marshall direct. Mr Marshall sought to suggest that the majority of the work that he did for Mr Tim Stack’s clients was by delegation by Mr Tim Stack.

80 A record produced by Stacks Taree purported to show that, over the period from late 2004 until 27 November 2009, Mr Tim Stack acted for some 524 commercial clients; Mr Marshall for some 414; and 83 such clients retained both Mr Stack and Mr Marshall. Mr Condon relied on this evidence to suggest that Mr Marshall had achieved recognition as someone who could be retained by the clients of Stacks Taree.

81 I do not think that this evidence is as cogent as Mr Condon submitted, or that it is capable of bearing the weight that he placed upon it. In his affidavit, Mr Tim Stack identified the record as a print-out of data from practice management software introduced by Stacks Taree in late 2004. However, in cross-examination, Mr Tim Stack said that only one of the two documents in question was a business record, whereas the other was a summary prepared not by the computer system but by “our IT specialist Rees [sic] Dodds in the Taree office” at the direction of Mr Maurie Stack.

82 The former document – the one that is a record produced by the software system – does indicate, for each matter listed, a number of details, including of the “person responsible” and the “matter type”. Mr Tim Stack said that the information extracted in that document was entered “by our PA, I think, Melinda, or Paige”. It is not apparent how Melinda or Paige came to allocate responsibility. The nomination of Mr Marshall as the “person responsible” is consistent either with instructions having been given direct to Mr Marshall or with instructions having been given to Mr Tim Stack and referred by him by Mr Marshall (of course, with the client’s consent).

83 Thus, the statement made by Mr Tim Stack at para 54 of his affidavit sworn 4 January 2010, that a review of the records shows that over the period to which they relate he had acted for a certain number of clients, Mr Marshall had acted for another number of clients, and they had acted for yet another number of clients jointly, is correct. But it does not show whether any individual client, among the 414 for whom Mr Marshall had acted, came to him direct. Nor does it show how many of those clients in total came to Mr Marshall direct.

84 The other document – that prepared by Rees Dodds – is no more than a summary, prepared for the purposes of this litigation, of the one that I have just discussed. It adds nothing to the probative value of the document that it purports to summarise.

85 Otherwise, Mr Stack’s evidence was given at a level of generality. He said that, once Mr Marshall had been introduced to a client, “it became the norm for that client to ring the office and ask directly for Tony both in relation to the original instructions and in relation to any subsequent matters” (same affidavit, para 57). The former category – those who rang Mr Marshall on a matter once they had been introduced to him in connection with that matter – clearly were clients “delegated” by Mr Tim Stack to Mr Marshall. It might not be correct to regard the latter category in that way. But the evidence does not permit any quantitative assessment to be made of the numbers of clients in each category. Nor does it enable any content to be given Mr Tim Stack’s words “it became the norm”.

86 On the other side of the coin, Mr Marshall’s evidence, which I accept, is that it was difficult for him to establish his own separate own practice. He agreed that he did take instructions direct from clients from time to time, but said that they were mostly small clients who were clients of Mr Stack and who had previously been “delegated” to him (see para 37 of his affidavit sworn 21 January 2010).

87 Support for this aspect of Mr Marshall’s evidence comes from the fact that some members of the Stack family became dissatisfied with his efforts at marketing, and the rate of development of his practice.

88 Although the reasonableness of the restraints is to be assessed at the time the contract was made, I have reviewed the evidence relating to Mr Marshall’s period of employment because it was relied upon by Stacks Taree in support of the injunction sought. The point of the review is to show that, to the extent that the evidence is relevant (as Mr Condon submitted it was) it does not support the proposition that Mr Marshall’s employment by Paton Hooke is likely to pose any significant threat to the long established and carefully cultivated goodwill and client connection of Stacks Taree among the Taree business community.

89 Again, if it is legitimate to take into account, in assessing the reasonableness of the restraints, events that have actually happened, then it must be borne in mind that Mr Marshall has not worked as a solicitor for the more than two months that have elapsed since he resigned from Stacks Taree on 27 November 2009. Thus, it is in my view likely that such connection as he may have built up with his former clients will have begun to diminish already, simply because he has withdrawn from the market for the provision of legal services in Taree for a period of time.

Justification for a restraint on solicitation

90 Taking into account the matters referred to at [23] to [26] above (and other references in the evidence to similar effect), I accept the proposition that a “robust view” should be taken in the assessment of the reasonableness of the restraints, either individually or collectively. I should point out (given that I have just referred to the Koops at [44]) that this is not a case where Mr Marshall took advantage of his employment “to prepare for later competition”. It was not put to him that he had taken the position with Stacks Taree simply in order to leave it when the time was ripe, and use his accumulated contacts and experience for his own benefit. Nor is it a case where Mr Marshall cultivated “the target market during employment” to “prepare the ground for its exploitation by himself after the employment” ended. Again, that was not put to him. But, even accepting, as I do, that Mr Marshall entered into the contract with the best of intentions, and hoping that it would lead to a long term career with Stacks Taree, it does not follow that, because that hope was disappointed, he is necessarily entitled to be free to compete with Stacks Taree. The question is what (if any) restraint on competition is justifiable, so as to afford reasonable protection of the legitimate interest that Stacks Taree has in its client base in Taree.

91 In this context, it is necessary to bear in mind, as the evidence for Stacks Taree makes plain, that the firm is (as its name would indicate) identified very closely, if not completely, with members of the Stack family. It is they who have built up the name, the practice, the reputation and the connection over (now) three generations. It was not until relatively recently that someone not a member of the Stack family (Mr Avery) became a director with equity in the practice. It is, I think, a little fanciful to suggest that such client connection as Mr Marshall may have built up over the term of his employment would be a significant counter to the extensive efforts of members of the Stack family, undertaken as I have said over three generations, to build not only the “brand” but its association with Stacks Taree (and, if it is relevant, Stacks TLF).

92 It was not disputed that there should be some restraint on solicitation. It seems to me that enforcement of some such restraint, for an appropriate period of time, should be regarded as the primary mechanism for severing the connection between Mr Marshall and former clients. That is so for at least two reasons. The first is that, as I have indicated, I think it unlikely that the promotion of Mr Marshall’s services over the last five years will have had any significant impact on the strength of the Stacks brand in Taree. The second, and related, reason is that the promotion of Mr Marshall on which Stacks relied was promotion in conjunction with Stacks Taree. Whilst, undoubtedly, that promotion pointed out (if it did not emphasise) Mr Marshall’s skills, it was nonetheless promotion under the aegis of Stacks Taree, and in the context of promotion of Stacks Taree.

93 I accept, as Mr Condon submitted that at least some members of the Taree business community are aware that Mr Marshall has left Stacks Taree. I accept, also, that some of Mr Marshall’s former clients have approached him to inquire what he is proposing to do. But it does not follow that the interest of Stacks Taree in its client base, and more generally its goodwill or connection within the Taree business community, will suffer serious impact if Mr Marshall is permitted to practise in Taree on condition that he does not solicit any former client until after 27 November 2010. And that is so even taking a “robust view” of the matter. See, in particular, the matters referred to at [85] to [88] above.

Duration of the restraint

94 I turn specifically to the first issue: the duration of the restraint against solicitation. As I have indicated, the evidence for Stacks Taree on this point is devoted principally to the question of how long it will take to install Mr Phoon as Mr Marshall’s successor.

95 Mr Moses submitted that, accordingly there was, no evidence to justify the contractual period of 12 months applicable to 13.1(a). I do not agree. The starting point in my view is that the parties have chosen the period of 12 months. As Rath J said in IRAF at 429, their choice of a particular period should be given considerable weight. In this context, I do not think that it is relevant to take into account the subjective understanding (or lack of it) of the parties. It does not seem to me to matter if (assuming it to be the case) subjectively neither Stacks Taree (through its directors who signed the contract) or Mr Marshall turned their mind to the period. The question is, I think, one to be looked at objectively, taking into account the terms of the contract.

96 It may also be worthy of note that the parties selected 12 months as the appropriate duration for the covenant against solicitation of employees of Stacks Taree or other Stacks entities (cl 13.1(b)). No objection is taken to the duration of that restraint.

97 However, and more compellingly, I think that Mr Marshall’s view of the restraint in cl 13.1(a) can be understood from his email of 8 October 2009, to which I have referred at [28] above. He regarded it as “obvious” that he would abide by the 12 months restraint “so far as it relates to current clients of the firm and the firms [sic] staff”. Although Mr Marshall did express some reservation as to the enforceability of cl 13, it seems to be clear that this applied only to cl 13.1(c). There is no hint in his email that he thought cl 13.1(a) or (b) to be unreasonable.

98 Mr Marshall was cross-examined on his email of 8 October 2009. The last sentence of that email was put to him and he was asked (T46.46) “to you that was obvious wasn’t it?” His reply was “[y]es, in relation to the words within the contract”. He was asked (T47.8) whether that statement “reflected [his] own personal view... ?” he replied “[n]o, it was what I was prepared to put forward as a measure of, or a way to try to deal with this amicably if it was the case that I did decide to challenge it”.

99 The following exchange then occurred (T47.13-.21, .33-.46):

Q. Why did you settle upon the period of time of 12 months?

A. Because it was a measure of compromise from the point of view that I wished to be able to stay in Taree and work as a solicitor. But if it was important to them that I not be able to solicit clients for 12 months or staff from the firm then I was happy to accept that.

Q. Because you thought 12 months in light of your background at the firm reflected a fair and reasonable protection for the plaintiff, is that right?

A. No, that is not correct.

Q. To you it was obvious that the restraint should be 12 months, is that right?

A. No.

Q. You did not seek in this email anything, a counter proposal from Stacks, did you?

A. No.

Q. This was a unilateral offer by you on 8 October 2009 to abide by the restraint for that period of time?

A. Yes.

Q. And can I suggest to you that when you put in the period of 12 months you thought that was fair to both sides did you not?

A. In the context of reaching an amicable agreement, yes.

100 A little later on, Mr Marshall was asked specifically about the proposition “that the restraint related to current clients of the firm” (T48.1). He was asked whether he accepted that a restriction to “current clients of the firm was a fair and reasonable protection for the plaintiff?” (T48.22). He replied “[i]n the context of what I was proposing, yes”. That context, he explained (T48.26) was that he “be enabled to stay in Taree with [his] family without having to relocate and work as a solicitor...”.

101 In general, I thought that Mr Marshall sought to tell the truth to the best of his ability. However, I found his evidence dealing with the period of 12 months, set out at [98] above, was difficult to accept. To me, it seemed to be an rationalisation after the event, and difficult to reconcile with the terms of the email. Likewise, I think that his comment to the effect that the period of 12 months was fair to both sides in the context of reaching an amicable agreement was a rationalisation, and one that did not sit easily with the terms of the email.

102 In truth, I think, Mr Marshall was keenly aware that what on the face of things was a considered admission by him in the email was inconsistent with the position put before the Court (an undertaking not to solicit clients for whom he had performed work for a period of six months from the date of termination of his employment). In my view, this passage of his evidence is an attempt to rationalise that perceived inconsistency.

103 Thus, as I have said, I draw support from the terms of the email for my view that the 12 month period proposed for the restraint against solicitation is reasonable; and I do so notwithstanding Mr Marshall’s explanation of it.

104 Some, although lesser, support for that conclusion is to be found in Mr Tim Stack’s evidence that it will take approximately 12 months for Mr Phoon to be introduced to his (Mr Tim Stack’s) clients as Mr Marshall’s replacement. It seems to me that the effective introduction of Mr Phoon to those clients, as Mr Marshall’s replacement, may properly be regarded as an aspect of the severing of Mr Marshall’s connection with those clients. Further, the period of 12 months is consistent with Mr Tim Stack’s evidence that he supervised Mr Marshall’s work, and saw clients jointly with Mr Marshall, for the first six to 12 months after Mr Marshall started to work for Stacks Taree.

105 Mr Moses relied on the evidence referred to at [30] above, of Mr Tim Stack’s proposal of “some sort of compromise whereby the firm made a payment to you and you not work as a lawyer in Taree for four to six months beyond February”. I do not think that this constitutes any concession that a restraint of that duration was all that was reasonably required. First, a period of 4 to 6 months beyond February 2010 would be a period of 7 to 9 months beyond the termination of Mr Marshall’s employment. Second, and more important, it is plain that Mr Tim Stack was looking at some sort of compromise that would provide some protection to Stacks Taree on the one hand and the ability for Mr Marshall to remain in Taree and work as a solicitor on the other.

106 Accordingly, I conclude that a restraint on solicitation for a period of 12 months from termination of employment offers no more protection than is reasonable for the legitimate interest of Stacks Taree in the goodwill attached to its relationship with those clients.

Second issue: all clients, or those for whom Mr Marshall worked?

107 The justification for the wider restraint against solicitation (i.e., extending to all clients of Stacks Taree) was, as I understood it, that it served to protect the employment strategy of Stacks TLF, Stacks Taree and other Stacks franchisees.

108 Mr Tim Stack gave evidence that:

(1) Stacks TLF sought to assist Stacks franchisees to attract bright young lawyers to work for them; in particular, bright young lawyers from large city firms;

(2) this was in the interest of the communities in which those franchisees carried on their practices, as well as in the interests of the franchisees;

(3) the standard form of employment contract (in the form of the contract signed by Stacks Taree and Mr Marshall), and in particular cl 13, was an important part of that strategy;

(4) it would be inimical to that strategy if bright young lawyers could be attracted from the city, introduced to the clients of the franchisee for whom they worked, and then leave and work in competition; and

(5) accordingly, if the covenants in cl 13 could not be enforced, the strategy would be undermined and it would be difficult to persuade franchisees to carry it out.

109 This evidence was in terms directed in particular to the geographic area of the covenant. However, as I understand it, the evidence was relied on in support of the covenants generally.

110 Mr Condon submitted, based on this evidence, that it was in the public interest for country areas to be able to attract young lawyers, and that the relevant restraints were justifiable by reference to that public interest. If young lawyers could not be attracted to the country, Mr Condon submitted, then the average age of those in practice in the country would continue to grow (as it was doing) and, as those presently in practice retired, it would be more and more difficult for country folk to obtain convenient access to legal services.

111 I do not think that this analysis is correct. The cases to which I have referred above insist that a covenant in restraint of trade is to be justified (if at all) by reference the extent to which it is no more than reasonably necessary to protect the legitimate interests of the covenantee. The legitimate interests that have been identified include protection of the employer’s goodwill. The need for protection arises where the former employee’s relationship with the clients or customers of the employer has been such that where, but for the restraint, the former employee would be able to take advantage of the relationship and obtain the business of those clients or customers for his or her own benefit. There are of course other legitimate interests that may be protected: for example, protection of the employer’s trade secrets or confidential information. But those other interests are not suggested to have been relevant in the present case.

112 As I have pointed out at [65] above, if a covenant in restraint of trade is reasonable as between the parties to it then it would be unlikely that the covenant would be held, nonetheless, to infringe the public interest. But it does not follow that, because the covenant supports or protects a public interest, it is thereby reasonable as between the parties to it. As Lord Parmoor put it in Fitch at 169:

“The first question to be asked is whether the covenant is reasonable in the interests of the parties, and the only test of reasonableness between the parties is whether the covenant affords any more than adequate protection for the party in whose favour it is imposed... whether the party in whose interests the restriction is imposed is seeking to obtain more than adequate protection.”

113 I accept that there is an important public interest in the ready availability of legal services to those who may have need of them. A not dissimilar interest was recognised by Lord Birkenhead in Fitch at 165. But a conclusion that a covenant is in the public interest, or serves to protect or advance the public interest, does not mean that it is reasonable as between the parties to it.

114 In this case, the legitimate interest of Stacks Taree that has been identified is its interest in preventing Mr Marshall from exploiting the connection that, in the course of his employment, he has built up with clients of Stacks Taree. The covenant against solicitation of clients can be justified to the extent that it serves to protect that interest, and is no more than is reasonably required for that purpose. It follows, in my view, that a covenant against solicitation which extends beyond those clients of Stacks Taree for whom Mr Marshall worked to clients of Stacks Taree generally is too wide.

115 What I have just said does not reflect accurately the terms of the covenant against solicitation when it is read in conjunction with cl 13.1(a) and the definition of “Client of the Firm”. The effect of that definition is to restrict the ambit of cl 13.1(a) to those who have been clients of Stacks Taree during the period of 12 months preceding the termination of Mr Marshall’s employment. But that does not affect the analysis set out in the preceding paragraphs.

116 There is no evidence to suggest that Mr Marshall would have any connection or relationship with clients of the firm other than those for whom he had worked, which could be exploited to the detriment of the firm. The evidence is, at the most, that the firm has chosen to promote him not just to its clients but to the Taree business community generally. I accept that it did so; but it does not follow that whatever recognition Mr Marshall may have gained through this process is something protectable at the instance of Stacks Taree.

117 Accordingly, I think that cl 13.1(a) should be read down so that it prevents only solicitation of any “Client of the Firm” for whom Mr Marshall had worked (that is, to whom he provided legal services) in the 12 months preceding the termination of his employment. That is not an exact formulation; but the intent of what I have said was met (save as to time) by the undertaking initially offered by Mr Marshall; and is met (including as to time) by the undertaking that he gave after I delivered my brief ex tempore reasons.

Third issue: validity of restraint on competition

118 Mr Condon submitted that the restraint contained in cl 13.1(c) was a reasonable element of the protection to which Stacks Taree was entitled. He referred to what Latham CJ had said in Lindner at 637 as to the difficulty of enforcing a covenant against solicitation, and the proper protection to be afforded by a restraint on competition.

119 I have noted at [76] to [78] above, in the context of cl 13.1(a), Mr Condon’s submissions which were relevant not only to that particular restraint but also to cl 13.1(c)).

120 Essentially for the reasons that I have given in discussing the first and second issues, I think that reasonable protection for the legitimate interest of Stacks Taree would be provided by a restraint on solicitation (limited to clients of the firm for whom Mr Marshall had worked during the 12 months preceding termination of his employment) for a period of 12 months from termination. No doubt, there will be some clients who may follow him to Paton Hooke. But the reality seems to me to be that the strength of the Stacks brand in Taree lies precisely in its promotion over three generations and for almost 80 years, in the great part by members of the Stack family.

121 There is no reason to think that Mr Marshall would disregard, or treat lightly, his undertaking given to the Court. He is an officer of the court. No doubt, he is fully aware of the significance of an undertaking, and of the consequences of breach. It was not put to him, and no case was put in submissions, that he would not honour the undertaking scrupulously. Nor was it put (save for the restriction to clients for whom Mr Marshall had acted in the 12 months preceding termination of his employment) that the undertaking was inadequate in its terms. Accordingly, as I have said, I think that the undertaking in the terms offered, for a period of 12 months rather than six months, does offer sufficient protection for the legitimate interests of Stacks Taree.

122 It is not the case that an injunction against solicitation, or an undertaking not to solicit, prohibits only a narrow range of conduct. Whilst it is neither necessary nor desirable to attempt to define the range of conduct that may be prohibited by a restraint on solicitation, there is no warrant for restricting the range of conduct prohibited to instances where the “solicitor” makes the first approach. That was confirmed by the judgment of Stein JA (with whom Sheller JA and Fitzgerald AJA agreed) in Barrett v Ecco Personnel Pty Ltd [1998] NSWCA 30. At 2[20], Stein JA rejected the submission that “[o]ne should construe “solicit”... in a highly mechanical fashion. You simply ask, who made the first approach?”. His Honour said “[t]his cannot be correct. One may acknowledge that in most instances the first approach will be made by the ex-employee to the former customer. Common sense however demands that this not be the exclusive means by which a solicitation may occur”. At 2[35], his Honour noted that the meanings of “solicit” included “to ask”, “to call for”, “to make request”, “to petition”, “to entreat” and “to persuade”. His Honour said “I cannot see that to propose to do business ceases to be soliciting business simply because the recipient invited the proposal”.

123 It follows that soliciting may occur both where:

(1) the “solicitor” makes the first approach to the “solicitee”; and

(2) where, the “solicitee” having made the first approach to the “solicitor”, the “solicitor” thereafter asks for the business or custom of the “solicitee”.

In each case, it could be said that there is a solicitation of the business of the “solicitee”.

124 For those reasons alone, I think that in the particular circumstances of this case, a covenant restraining competition is not reasonably necessary in addition to a restraint on solicitation, to afford adequate protection to the legitimate interests of Stacks Taree.

125 There is another, and quite separate, consideration going to the validity of the covenant against competition. As I have indicated, it applies within a geographical area defined by two overlapping circles, each having a radius of 10 kilometres: one centred on the post office at Taree and the other centred on the post office at Wingham. There was not, in my view, any cogent evidence to justify the area of the restraint. Mr Tim Stack sought to deal with it at paras 63 to 74 of his affidavit sworn 4 January 2010. That evidence was directed more to showing that there were substantial towns or cities outside the area of restraint (including Forster / Tuncurry, Port Macquarie (a city of over 70,000) and a number of towns near Port Macquarie. As to Wingham, the only evidence was that:

(1) Mr E R Stack had started practice there back in 1931, and there was “still a certain loyalty of the business community of Wingham” to the Stacks brand; and

(2) from time to time, real estate agents in Wingham send work to Stacks Taree.

126 The evidence did not show why the area of restraint defined in the contract was the minimum necessary for the protection of the legitimate interests of Stacks Taree: as opposed to, for example, circles of a radius of 5 or 2 kilometres; or some other area. Indeed, as I have observed, the evidence did not really seem to be directed to that point, but rather to showing what opportunities might be available to Mr Marshall outside the area of restraint.

127 Again, although Mr Tim Stack said that Taree, Chatham and Cundletown were effectively one township, he did not say how much work (if any) he individually, or the firm in general, drew from Chatham or Cundletown proper, and how much from Taree proper.

128 As I observed earlier in these reasons, someone who seeks to uphold a covenant in restraint of trade must show, in the event of a challenge, that the restraint provides no more than reasonable protection for that person’s legitimate interests. In my view, the evidence for Stacks Taree fails to show that the area of the restraint is reasonably necessary. Indeed, at the risk of repetition, I do not think that it comes to grips with that question.

129 Mr Condon submitted that enforcement of the covenant would not mean that Mr Marshall could not work, and support his family. He relied on the evidence to which I have just referred to show that Mr Marshall had the prospect of obtaining employment in locations outside the area of restraint. I accept the point in principle. But the validity of a restraint does not depend on its impact on the person restrained. In any event, as Mr Marshall said, if he were to work in some of those locations, he would be forced either to travel substantial distances each day, or to relocate, with his family, away from the Taree area.

Conclusion

130 Those are the detailed reasons for the decision to dismiss the claim for injunctive relief given, pursuant to short reasons, on 28 January 2010.

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LAST UPDATED:
16 July 2010