Which case won?

casea
The case for the employee
  • I did provide services to people that had been clients of the firm while I worked there, but I did not provide “accounting” services within the meaning of the restraint clause because at no time during my employment with the firm was I ever a chartered accountant or taxation agent.
  • This is demonstrated by the fact that all work I performed at the firm was always subject to review and sign off by a more senior, qualified staff member.
  • It would be unreasonable for the restraint clause to apply to junior employees; would the firm be permitted to restrain a receptionist in this way, for example?
  • The damages clause is extravagant and unconscionable in its application to me as a junior employee. It is not a genuine pre-estimate of the firm’s loss and damage and therefore amounts to a penalty, which is not permitted by law.
  • The restraint clause goes way beyond what is reasonably necessary to protect the firm and they should not be allowed to enforce it against me.
caseb
The case for the employer
  • We introduced the clients to the employee and helped him to build up a connection with those clients. The goodwill in those relationships is a legitimate business interest that belongs to the firm, not to the employee, and we deserve to be compensated through the payment of damages.
  • Although not a qualified accountant, the employee was a para-professional performing ongoing work for clients, and therefore had regular and direct contact that enabled the establishment of a strong client relationship.
  • The restraint clause is not unreasonable and does not prevent the employee from earning a living. Indeed, there is nothing stopping him from providing accounting services to any client, the clause simply requires him to pay us the liquidated sum or damages that we have suffered if he performs work for a client introduced to him while he was at our firm.
  • The liquidated damages are a reasonable pre-estimate of the cost to acquire a parcel of fees of clients in an accounting practice and does not amount to a penalty.
  • The restraint clause does no more than what is reasonably required to protect our legitimate business interests and the employee should pay us damages.

So, which case won?

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Case A Case B

Case B won. You were right!

How people voted
a61%
b39%

Expert commentary on the court's decision

Clayton DavisManaging Director
“The Court of Appeal found that the clause placed little restraint on the employee, while providing reasonable protection to the goodwill of his former firm.”
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.

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