Damages clause made restraint of trade "reasonable"
09 July 2012 7:20am
An "unusual" court ruling shows that including a liquidated damages clause in contracts might assist employers in having their restraints of trade upheld, an employment lawyer says.
The case involved an employee of Bird Cameron, a chartered accountancy firm, who had signed a restraint that prevented him from providing services to the company's clients for a period of three years after the end of his employment.
The restraint specifically only applied to clients to whom the worker had provided services during his tenure. The contract also required that the worker pay Bird Cameron liquidated damages if he breached the restraint. (The liquidated damages were set at 75 per cent of the fees that Bird Cameron had earned from the client in the previous year.)
Upon leaving Bird Cameron six years later, the worker took up part-time employment with a client of the business, and also worked part-time for another accounting firm.
The client then terminated its engagement with Bird Cameron and took its business to the worker's new accounting firm.
In the Victorian County Court, Bird Cameron sought damages from the worker - in the order of $190,000, assessed using the formula set out in the contract - for breaching his restraint. Its claim failed there, but succeeded in the State's Court of Appeal.
Examining the case during an HRD Plus presentation, Erin Rice, a senior associate at Mills Oakley Lawyers, said the Full Court accepted that Bird Cameron had a legitimate interest in protecting the customer connection it had with those clients who dealt directly with the worker.
"The Court found that Bird Cameron had provided the introduction to the client and the facilities and supervision to enable [the worker] to build up customer connections, and accordingly the goodwill of this relationship belonged to Bird Cameron," she said.
According to Rice, the decision is "surprising" for a number of reasons, and is one that employers should take note of.
The worker in the case was a junior employee and only about 20 years old when he started as a trainee accountant with Bird Cameron, she points out.
"The law in relation to restraint clauses is that whether they are reasonable is based on the circumstances at the time. The junior nature of [the workers'] role at the time the restraints were entered into in this case makes it surprising that a restraint of this length and severity was seen to be reasonable (particularly taking into account the liquidated damages provisions)."
Secondly, Rice says, it is "difficult" to understand why the Court found the length of the restraint - three years - was reasonable to protect the company's interest.
"The Court found that the attachment between [the worker] and the client would likely survive for this length of time. However, this seems like an overly long period of time, given that the clients would presumably need to obtain other accounting services in the meantime, which would give the employer the chance to re-establish the relationship. "
Finally, she notes, "and rather unusually", the imposition of the liquidated damages clause formed part of the basis for the Court's decision that the restraint was reasonable.
The Court reasoned that the restraint was reasonable because, in effect, it didn't prevent him outright from dealing with clients of the employer, she says.
"Rather, the effect of the clause was that he could deal with them, but had to bear the financial consequences of the liquidated damages clause if he chose to do so."
The tip to be drawn from this case, Rice says, is that including a liquidated damages clause might assist in the restraint being upheld.
Employers should be particularly careful, however, in assessing the potential damage of losing relevant clients, she warns.
Rice examines three additional cases and outlines further drafting tips in her presentation for HRD Plus gold subscribers - see below. Learn more about HRD Plus and upgrade your subscription here.