Restraint of trade law explained

The general principle is that a restraint of trade is prima facie invalid, but may be enforced if it affords no more than reasonable protection to the party in whose favour it is imposed and is not injurious to the public.[36]
The party who seeks to enforce the restraint has the onus of proving that the restraint is reasonable as between the parties.[37] The restraint must operate to protect a legitimate interest of the covenantee. The test is whether the restrictive covenant exceeds what is reasonable and necessary for the protection of the legitimate interest.
The reasonableness of the restraint is determined at the date of entry into the agreement.[38] The issue is whether the agreement was a reasonable one to make at the relevant time, having in mind the best estimate the parties could make for the future.[39] The test is whether at the date of the agreement reasonable people in the position of the parties would have expected that performance of the agreement… would be likely to generate significant new good will which the covenantee… could reasonably protect.[40]
In employee cases, subject to reasonable restraints to protect an employer’s legitimate interests, an employee should be free to pursue a living in his or her chosen field. The principle interest which can be protected by a restraint against a former employee is the benefit the former employer has of the relationships with its customers.[41] A restraint upon a former employee is reasonable if it allows a replacement employee to establish a connection with customers and thereby protect the employer’s goodwill.[42] The courts have found such restraints to be valid where they are reasonably necessary to prevent disclosure of confidential information garnered by the former employee in the course of his employment, or the exploitation of the connection built up by that employee with the former employer’s customers in the course of that employment.
The breach of the respondent’s contract of employment that is pressed in this application does not relate to general business know how, or his subsequent employment generally as a financial consultant, but instead the use of his personal knowledge of the applicant’s clients obtained during the tenure of his employment. In such circumstances, the courts have held that, subject to limitations of reasonability, clauses restricting former employees from soliciting clients from their former employer to their new employer should be upheld. In Jardin v Metcash Ltd,[43] the New South Wales Court of Appeal summarised the law as follows (citations removed):
“These statements are not, however, to be understood as requiring that the employee be proved to be in a position to control whether the customer remain or leave with the business. The employer is entitled to protection against the use of ‘personal knowledge of and influence over’ its customer which the employee might acquire in the course of his or her employment, so as to undermine its customer connections. It is against the ‘possibility’ of its business connection being adversely affected by the use of that ‘personal knowledge and influence’ that the employer is entitled to be protected. Lindner v Murdoch’s Garagesummarized the relevant principle as follows:
‘Where an employee is in a position which brings him into close and personal contact with the customers of a business in such a way that he may 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 his business, a covenant preventing him from accepting employment in a position in which he would be able to use to his own advantage and to the disadvantage of his former employer the knowledge of 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.’”
Indeed courts have held that restraint of trade clauses limited to customers with whom the employee had business dealings are more likely to be valid, such clauses being held to be reasonably necessary to protect customer connections with the employer in circumstances where:
(a) the employee was in a position to gain the customer’s trust and confidence; and
(b) the relationship between the employee and customer is such that there is the possibility that the customer’s business may go with the existing employee.[44]
In circumstances where, prima facie, the restraint of trade clause is valid, and there is clear evidence of the respondent’s breach of this clause, this limb of the interlocutory injunction test is satisfied.
Insofar as the issue of “balance of convenience” is concerned it is obvious enough that clients enjoy contractual relations with the company, not the company’s employees. Accordingly, the purpose of restraint of trade clauses are to provide that, following departure of an employee that has a close personal relationship to his or her employer’s clients, the employer is given an opportunity to introduce new employees to such clients and to permit a new relationship to be formed as between them.
The applicant has submitted that in the financial services industry, an ongoing relationship with a client will have enduring benefit to the financial adviser, in that annual management fees accrue, and continue to accrue. Upon removal of a client’s portfolio from a financial management company, it is submitted that that ongoing source of revenue is permanently lost. Further, any opportunity for referrals from that existing client is similarly lost. I have no difficulty in accepting those submissions. In circumstances where it cannot be determined, with precision, how long any relationship between a financial advice company and the client would have lasted but for the departing employee’s breach, and what referral work would have been realised, damages for breach of conflict are difficult, if not impossible to properly particularise. It is for this reason that the applicant submits that damages are an inadequate remedy for future respondent breaches of his restraint of trade obligations.
Additionally, the applicant submits that where the interlocutory relief which is sought does not relate to clients that have already departed from the applicant for the respondent, and does not in any other way restrict the respondent’s capacity to work in the financial advice industry for Financial Grace, that the balance of convenience would support the limited interlocutory relief sought by the applicant.
Assuming that the factual circumstances are found to support the granting of such an order, this submission has much merit.
Does the applicant have a prima facie case?
In my view, the applicant has failed to establish a prima facie case in relation to the allegation that the respondent has solicited former clients.
The meaning of solicitation was confirmed by Campbell J in Hellmann Insurance Brokers v Peterson:[45]
“11. The meaning of ‘solicitation’ is elucidated by a decision of Wood CJ at CL in R v Laws [2000] NSWSC 880; (2000) 50 NSWLR 96, at 98. His Honour, at [8] recorded the remarks of Spigelman CJ and Hidden J in R v Azzopardi, 1 October 1998, unreported, which in turn approved remarks of Stout CJ in Sweeney v Astle [1923] NZLR 1198 at 1202 which I quote:
‘The word ‘solicit’ is a common English word and it means in a simplified form, ‘to ask’. In various English dictionaries this simple meaning is given, but other simple words are also used to explain other meanings it possesses, such as ‘to call for’, ‘to make a request’, ‘to petition’, ‘to entreat’, ‘to persuade’, ‘to prefer a request’.’
12. Whether an employee is soliciting a former client is not something which depends upon whether it is the employee who telephones or arranges to meet the former client, or the other way around. Rather, whether solicitation occurs depends upon the substance of what passes between them once they are in contact with each other. There is solicitation of a client by a former employee if the former employee in substance conveys the message that the former employee is willing to deal with the client and, by whatever means, encourages the client to do so.”
Entello Pty Ltd v Firooztash [2016] QDC 050 (11 March 2016) per Farr J