Birdanco Nominees Pty Ltd v Money  VSCA 64 (4 April 2012)
In 2002, Liam Money (then aged 19) was offered a job with Bird Cameron Chartered Accountants ('Bird Cameron'). He commenced his employment in January 2003 working with the firm as a trainee accountant.
Mr Money's employment contract contained a post-termination restraint clause preventing Mr Money from providing accounting services to any client of Bird Cameron with whom he worked in the three years prior to the termination of his employment with the firm. The restraint operated for a period of three years after his employment ceased. If Mr Money breached the restraint he would be liable to pay Bird Cameron a sum equal to 75% of the fees it earned from the relevant client in the last financial year in which it remained a client of the firm.
Mr Money was employed by Bird Cameron for over six years. In that time he was promoted to the position of Supervising Accountant, although he never completed the study required to obtain formal accounting qualifications. Mr Money worked directly with clients but his work was subject to review and 'signing off' by a principal accountant in his department. One of the clients with whom Mr Money developed a close working relationship was the Szencorp Group, which was a significant client of Bird Cameron.
In April 2009, Mr Money resigned from his employment with Bird Cameron. In July 2009 he took up a part time position working for the Szencorp Group three days per week. He also commenced part time employment (two days per week) with accounting firm Benjamin King Money, where his father, Paul Money, was a director and principal. In August 2009, the Szencorp Group sought a quotation from Bird Cameron for the performance of accounting services for the following 12 months. A similar quote was requested from Benjamin King Money. Bird Cameron's quotation was returned as $144,760 whereas the Benjamin King Money estimate was $71,500.
In September 2009, the Szencorp Group terminated its retainer agreement with Bird Cameron and engaged Benjamin King Money to perform accounting services for the remainder of that financial year.
Mr Money performed a range of accounting services for the Szencorp Group (and certain other smaller clients of Bird Cameron) while engaged by Benjamin King Money.
In 2010 Bird Cameron commenced proceedings against Mr Money in the County Court. It claimed an amount equivalent to 75% of the fees (for the year to 30 June 2009) of those clients for whom Mr Money continued to do work at Benjamin King Money following the termination of his employment with Bird Cameron – primarily, the Szencorp Group.
Mr Money argued the restraint clause in his employment contract was unenforceable as it was not a reasonable protection of Bird Cameron's interests. He also argued the liquidated damages clause was unenforceable as a penalty because the calculation (75% of fees) was not a genuine pre-estimate of the loss Bird Cameron would suffer as a result of a breach of the restraint provisions.
In November 2010, his Honour Judge Anderson of the County Court decided that the restraint went far beyond what was reasonable to provide adequate protection to Bird Cameron's legitimate business interests and could not be justified. His Honour said the circumstances here were different to previous cases involving employment contracts signed by employees at a more advanced stage of their career, compared to Mr Money's employment contract, which was formed at the time he was a very junior employee.
In relation to damages, his Honour found the 75% of fees calculation was unenforceable as it was not a genuine pre-estimate of Bird Cameron's loss in the event of a breach of restraint by Mr Money and could bring about an 'extravagant and unconscionable' result in certain circumstances.
However, when Bird Cameron appealed against the County Court's findings, the Supreme Court of Victoria arrived at a very different decision.
The Court assessed three aspects of the restraint to determine whether it was unreasonable – the nature of the restrained conduct, the consequences of a breach and the duration of the restraint period.
The restraint did not prevent Mr Money from working as an accountant or from acting in direct competition with Bird Cameron. In fact, the Court found the practical effect of the clause did not even prevent Mr Money from acting for the clients for whom he worked while employed by Bird Cameron – rather that he could provide those services subject to paying the agreed sum of liquidated damages to his former employer. The Court likened this to a payment in respect of the goodwill which Bird Cameron had built up in that client. In this context, the Court found the clause placed 'little restraint' on Mr Money while providing reasonable protection to his former employer.
In relation to the amount of damages, Mr Money had agreed during the initial proceedings before the County Court that the calculation based on 75% of fees was a reasonable pre-estimate of the price payable to acquire a parcel of fees from a client in an accounting practice. Accordingly, the Court was satisfied an amount of damages at this level was not unreasonable in all the circumstances.
Finally, the Court formed the view that the restraint's three year duration was acceptable as it was likely Mr Money would still retain some level of attachment necessarily formed with a client for some years after ceasing to provide accounting services.
On that basis, the Court upheld the terms of the restraint clause in Mr Money's employment contract and ordered that he pay Bird Cameron $188,495.65 plus interest (being 75% of the fees received by the firm from the Szencorp Group and other smaller clients in the previous financial year) as well as paying his former employer's legal costs of both the appeal and the initial proceeding.
Lessons for employers
The general rule regarding post-termination restraint clauses in employment contracts is that Courts will regard them as unenforceable, unless the employer can prove they are reasonable. As this case demonstrates, where the various elements of a restraint provision go no further than what is required to genuinely protect the interests of the employer, based on a best estimate of what will unfold during the employment relationship, Courts are prepared to enforce such terms against former employees.
It is important that an employer who seeks to rely on a post-termination restraint can demonstrate the clause was appropriately drafted and reasonable in all the circumstances at the time the contract was formed.
This may mean an employment contract will need to be varied from time to time to amend a restraint provision, if necessary. For example, this might be required when an employee changes roles or is promoted to a new position, especially where they will have greater responsibility for service delivery or increased client contact as a result.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.