Restraints of trade

This extract from a decision of the Federal Court of Australia deals with many of the legal principles which attend the issue of the validity of post employment restraints of trade.

“The second question: is the Restraint Clause enforceable?

It is not in dispute that the Restraint Clause constitutes a restraint of trade pursuant to s 4 of the Restraints of Trade Act 1976 (NSW) (RoT Act) which provides that a “restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not”: s 4(1) RoT Act. Section 4(3) of the RoT Act provides:

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 restrain is not against public policy) as the Court thinks fit and any such order shall, notwithstanding subsection (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.

In Stacks Taree v Marshall [No.2] [2010] NSWSC 77 McDougall J adopted the following summary of principles, subject to some minor modifications which it is not necessary to set out, in relation to restraints under the common law and the RoT Act at [44]:

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) 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 (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) 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 invalid unless 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, 2nd 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) 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.

In Woolworths Ltd v Olson [2004] NSWCA 372 the New South Wales Court of Appeal (Mason P, McColl and Bryson JJA) said in relation to the application of s 4 of the RoT Act at [42]:

This provision was authoritatively expounded by McClelland J in Orton v Melman [1981] 1 NSWLR 583. First, the court determines whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed. Next, the court determines whether the restraint, so far as it applies to that breach, is against public policy. If it is not, the restraint is valid, subject to any order which may be made under s 4(3).

As Monarch submits, the breaches by Messrs Puxty and Coggan infringe the Restraint Clause where, within the Restraint Period, they solicited, attempted to solicit or accepted instructions to perform any work from clients of Monarch. Examples of such conduct were in evidence before me some of which is summarised at [107]-[111] above. In circumstances where I have found that Monarch did not give its consent to Mr Puxty taking with him the Puxty Clients at the end of his employ with Monarch for the purposes of the Restraint Clause, I am satisfied that the alleged breaches infringe the terms of the Restraint Clause properly construed.

The respondents do not contend that the Restraint Clause is against public policy.

Accordingly, the Restraint Clause is valid subject to any order which may be made under s 4(3) of the RoT Act.

The respondents contend that Monarch has failed to establish, by reference to relevant evidence, that a restraint period of not less than 12 months is reasonably necessary to protect its legitimate interests.

Monarch submits that, as explained by Ms Coulter (see [72] above), the Restraint Clause is reasonable and reasonably necessary for the legitimate protection of its business because:

(1) Messrs Puxty and Coggan had access to all of Monarch’s referral partners, a database Ms Coulter spent the previous seven years establishing, and to the entirety of XPLAN which included all of Monarch’s client’s contact details. This information constitutes knowledge obtained by Messrs Puxty and Coggan in the ordinary course of trade which would have allowed them to take advantage of their trade connection and to use information confidentially obtained;

(2) Messrs Puxty and Coggan had a high level of autonomy in their roles and would be operating in Newcastle whilst Ms Coulter was based in Sydney. They were both senior employees within the business, operated the Newcastle office together and had autonomy over various matters involving the Newcastle office. In circumstances where Messrs Puxty and Coggan were operating the Newcastle office alone, they became its face such that they represented Monarch in Newcastle;

(3) as employees, Messrs Puxty and Coggan were to bring in new business and clients to Monarch. The business of financial planning is about building trust and developing client relationships which would constitute a customer connection that Monarch would need to re-establish, develop and foster at the conclusion of Messrs Puxty’s and Coggan’s employment;

(4) Messrs Puxty and Coggan had not operated their own business previously and would not appreciate the hard work, effort and time that went into building the business; and

(5) Ms Coulter was investing $100,000 into the business to open the Newcastle office, from where Messrs Puxty and Coggan would operate.

The respondents submit that a short period of restraint would permit steps to be taken to secure the loyalty of clients and it does not follow that a longer period is justifiable. They say that the restraint must go no further than is reasonably necessary. The respondents refer to cl 19.2(a) of the Employment Agreements (see [69] above) which provides for a “Restraint Period” of six months for persons employed less than one year and submit that Messrs Puxty and Coggan were employed for barely over one year.

In relation to an assessment of the reasonableness of the duration of the restraint Monarch refers to the analysis undertaken in Extraman (NT) Pty Ltd v Blenkinship (2008) 23 NTLR 77 at

[69]-[81] as applicable to the analysis I am to undertake in this case.

In Extraman the first defendant, Mr Blenkenship, was a shareholder in some of the plaintiff companies. Those companies, which carried on a labour hire business for the mining, resources and engineering and offshore marine industries in Western Australia, the Northern Territory and Queensland, were sold to Skilled Group Ltd pursuant to a share sale agreement which, among other things, provided that Mr Blenkinship would not compete with or carry on the same or a substantially similar business as that of Extragroup Pty Ltd and its subsidiaries in specified areas including the Northern Territory for up to five years from 4 July 2005. The relevant clause extended to procuring that the second defendant would not do so. At the time of the sale Mr Blenkinship also entered into another agreement with Extraman (NT) Pty Ltd pursuant to the terms of which he was employed as a branch manager. That agreement provided that Mr Blenkinship would not compete with Skilled Group Ltd and its subsidiaries in specified areas including the Northern Territory for up to two years from the termination of his employment.

In July 2007 Mr Blenkinship’s position as branch manager in Darwin with Extraman (NT) changed and he was thereafter employed as regional manager for the Northern Territory with Skilled Group Ltd. Mr Blenkinship was offered a new employment agreement which he did not sign. However, it was common ground that he accepted the new position in accordance with the terms of that document, cl 9.3 of which provided that the earlier employment contract with Extraman (NT) was terminated by mutual agreement without affecting ongoing obligations under it including the restraint clause.

After receiving his final instalment of the purchase price pursuant to the share sale agreement, Mr Blenkinship resigned his employment with Skilled Group Ltd effective 24 November 2007. Thereafter he announced his intention to re-enter the Northern Territory labour hire market and compete with the plaintiffs.

The defendants argued that cl 11 of the share sale agreement was not enforceable including relevantly that it was unenforceable for being an unreasonable restraint of Mr Blenkinship’s trade. In that regard one of the questions considered was the reasonableness of duration of the restraint in relation to which Angel J said at [69]:

There are a number of cases to the effect that the reasonableness of duration depends upon how long it will take for the covenantor’s customer connection to fade away or for the covenantee to secure a firm connection with customers: See the cases discussed in Heydon: The Restraint of Trade Doctrine 2nd ed (1999) at 164–166. IRAF Pty Ltd v Graham [1982] 1 NSWLR 419 at 429 and Brown v Brown [1980] 1 NZLR 484 have proved influential in this regard; and see Lloyds Ships Holdings Pty Ltd v Davros Pty Ltd & Ors (1987) 17 FCR 505 at 524; Cream v Bushcolt Pty Ltd [2004] ATPR 42–004; [2004] WASCA 82; Fadu Pty Ltd v ACN 008 112 196 Pty Ltd (supra) at [83]. A purchaser, however, is entitled to protect not only the connection with existing customers of the business but also to profit from its established reputation: Brown v Brown [1980] 1 NZLR 484 at 490. See also Trebilcock: The Common Law of Restraint of Trade (1986) Carswell at 241–242.

Thereafter much of his Honour’s analysis concerns the enforceability of a restraint in the context of a sale of business and thus the protection of goodwill. Contrary to Monarch’s submission I do not find this analysis to be of any particular relevance to the task before me. At [76] Angel J recognised the demarcation that the law draws between restraints in respect of a sale of business and those in relation to employment contracts noting that the latter “concern protection limited to trade connection and trade secrets”, referring to Herbert Morris v Saxelby [1916] 1 AC 688.

In OAMPS Insurance Brokers Ltd v Peter Hanna [2010] NSWSC 781 the defendant, Mr Hanna, had been employed by the plaintiff, OAMPS, as an insurance broker from 1990 to 2010 when he resigned, having accepted an offer to work for one of OAMPS’ competitors, Strathearn Insurance Brokers. His resignation took effect on 28 May 2010 and his employment with Strathearn commenced on 7 June 2010. Mr Hanna’s employment contract with OAMPS incorporated a Post Employment Restraint Deed which relevantly included:

To reasonably protect the goodwill and the legitimate business interests of the Company, during the Restraint Period and within the Restraint Area (referred to below), you will not, without prior written consent of the Company, directly or indirectly:

(a) …

(b) Canvass, solicit or deal with, or counsel, procure or assist another person to canvass, solicit or deal with any client of the Company with whom you have had dealings during the two year period prior to your employment ending.

Restraint period means, from the date of termination of your employment:

(a) 15 months;

(b) 13 months;

Among other things, OAMPS sought an order restraining Mr Hanna, up to and including 28 August 2011, alternatively 28 June 2011, alternatively 28 May 2011, without its prior written consent, from directly or indirectly canvassing, soliciting or dealing, or counselling, procuring or assisting another person to canvass, solicit or deal with particular clients, reflecting cl 1(b) of the Restraint Deed. Mr Hanna sought to impeach cl 1(b) of the Restraint Deed on two bases including relevantly that it is void as going beyond what is reasonably necessary to protect OAMPS’ legitimate protectable interest.

On that question, after referring to the relevant facts, Hammerschlag J recorded the parties’ respective submissions at [78]-[79]:

78 OAMPS submitted that given that every policy will be renewable within 12 months from the defendant’s departure, 15 months restraint is the minimum period to ensure OAMPS an untrammelled opportunity of not less than three months across the portfolio to protect its customer connection by establishing a rapport with, and demonstrating competence to, the clients.

79 The defendant seemed only mildly (if at all) to contest that 12 months was the minimum period required by OAMPS to secure its customer connection. He submitted instead that this was the wrong criterion for assessing reasonableness of the period. He put that the correct criterion (indeed the only criterion) is the time needed to sever the relationship between the defendant and the OAMPS clients he serviced (and who presumably would patronise OAMPS after his departure). He put that OAMPS failed to establish reasonableness because it did not lead evidence of what time would be taken to effect such severance.

At [80] his Honour observed that in “this jurisdiction both criteria have been identified as appropriate” and after referring to the authorities reasoned at [91]-[94]:

91 The Restraint Deed is aimed at protecting OAMPS’ interest in its customer connections by preventing the defendant from using his personal knowledge and influence over the clients built up during the course of his employment with OAMPS. The question is whether, on the whole of the evidence, OAMPS has proved circumstances from which reasonableness can be inferred.

92 As earlier mentioned, the critical point in time for OAMPS in securing its business connection (or for that matter for bringing about severance of the defendant’s relationship with the client) is the policy renewal date. The renewal dates of the portfolio are spread throughout the year.

93 At a minimum therefore, protection for 12 months is reasonable. This is the minimum necessary to give OAMPS one opportunity to cement its connection or for the defendant’s connection to be severed across the portfolio.

94 Twelve months also ensures an untrammelled opportunity during the crucial three month renewal period in respect of policies renewed during the nine months commencing three months after the defendant’s departure.

An appeal from OAMPS was dismissed: see Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267 (Hanna Appeal). In Hanna Appeal Allsop P (with whom Hodgson JA and Handley AJA agreed) considered the test adopted by Hammerschlag J in determining reasonable protection of the connection of clients. At [41]-[45] his Honour relevantly said:

41 The approach of the primary judge to the reasonable protection of the connection of the clients to OAMPS was to identify a period (12 months) which would substantially ensure that OAMPS was able to undertake renewal of all the insurance policies of the relevant clients, without the competition of Mr Hanna in his new employment. At [81]-[83] the primary judge set out a description of two “tests” used by Brereton J in Koops and by McDougall J in Stacks Taree v Marshall [No 2] [2010] NSWSC 77 as follows:

…

42 The appellant said that the primary judge erred by not adopting the test in Stacks and by not concluding that there was inadequate evidence led to form any conclusion as to how long it would take for the connection to lapse. Thus, it was said, OAMPS had not discharged the burden of proof.

43 I disagree. There is no legally required test in these circumstances. The use of one test or another depends on the facts and the evaluation of the approach that is reasonable. The judge is required to evaluate the evidence about connection and adopt an appropriate approach to assessing what is required to protect reasonably the connection of the former employer. The proper approach was described in Stenhouse Australia Ltd v Phillips [1974] AC 391 at 400 set out by Hodgson JA in Miles v Genesys Wealth Advisers Ltd [2009] NSWCA 25 at [36]-[37], as follows:

“[36] In my opinion, there is no precise rule on the basis of which the period for which an employer is legitimately entitled to protection can be determined. I would not endorse the statement by Young J in DalySmith [Corporation (Aust) Pty Ltd v Cray Personnel Pty Ltd (Supreme Court of NSW, Young J, 14 April 1997, unreported)] at 13 that ‘a restraint that enures after the time taken for a reasonably competent new employee to master the job and be able to demonstrate to the customer that he or she is effective and efficient will be too long”.

[37] I would respectfully adopt the general statement of principle by the Privy Council in Stenhouse at 400:

The accepted proposition that an employer is not entitled to protection from mere competition by a former employee means that the employee is entitled to use to the full any personal skill or experience even if this has been acquired in the service of his employer: it is this freedom to use to the full a man’s improving ability and talents which lies at the root of the policy of the law regarding this type of restraint. Leaving aside the case of misuse of trade secrets or confidential information (which is separately dealt with by clause 3 of the agreement and which does not arise here), the employer’s claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee may have contributed to its creation. For while it may be true that an employee is entitled – and is to be encouraged – to build up his own qualities of skill and experience, it is equally his duty to develop and improve his employer’s business for the benefit of his employer. These two obligations interlock during his employment: after its termination they diverge and mark the boundary between what the employee may take with him and what he may legitimately be asked to leave behind to his employers.”

44 Hodgson JA also said at [41] in that case, that minds may differ about what is a reasonable protection and about the balance between the connection that properly belongs to the former employer and the right to practise a trade or profession of the former employee.

45 Regard should also be had to what the Privy Council said in Stenhouse at 402:

“… The question is not how long the employee could be expected to enjoy, by virtue of his employment a competitive edge over others seeking the clients’ business. It is, rather, what is a reasonable time during which the employer is entitled to protection against solicitation of clients with whom the employee had contact and influence during employment and who were not bound to the employer by contract or by stability of association. This question … their Lordships do not consider can advantageously form the subject of direct evidence. It is for the judge, after informing himself as fully as he can of the facts and circumstances relating to the employer’s business, the nature of the employer’s interest to be protected, and the likely effect on this of solicitation, to decide whether the contractual period is reasonable or not. An opinion as to the reasonableness of elements of it, particularly of the time during which it is to run, can seldom be precise, and can only be formed on a broad and common sense view.”

In Hanna Appeal Allsop P said at [46] that once it was accepted, “as on the evidence the primary judge was entitled to do, that renewal was a critical time for each client, 12 months is difficult to criticise” as a reasonable period.

Monarch relies on Ms Coulter’s evidence as to the need for the Restraint Clause to establish the reasonableness of its duration. As set out above, she explains that the business of financial planning necessarily involves the building of relationships of trust and personal connection. Most of Monarch’s business was one of wealth protection and most of its clients were insurance, rather than superannuation, clients, with Monarch advising on and brokering insurance coverage for its clients. Monarch relies on evidence given by Mr Puxty about the renewal process for policies:

Mr Mahendra: Can I just – a couple of things I want to understand about this process. This type of policy renewal occurs every 12 months?

Mr Puxty: Correct.

Mr Mahendra: And so when it comes to that renewal period, it’s that – as far as financial advisers are concerned, is an opportunity to reconnect with the client and re-establish that rapport. Correct?

Mr Puxty: Unless you’ve done it previously, yes.

Mr Mahendra: And a lot of the clients that you’re dealing with are clients where they have this annual cycle where you will then approach them or they will approach you on that 12-month mark in order for you to then look at what insurance policies and the like are appropriate for the coming year. Correct?

Mr Puxty: Not always at the anniversary date, but some of them do, yes.

Further, although not conclusive, Messrs Puxty and Coggan in signing their respective Employment Agreement acknowledged that Monarch’s business “is fundamentally built on its relationships with clientele and customers and these restrictions are necessary to protect” Monarch’s “goodwill, business, interests and Confidential Information” and that the restrictions in the Restraint Clause “are reasonable and go no further than is necessary to protect the goodwill, business, interests and Confidential Information of” Monarch.

The reasonableness of the Restraint Clause is to be assessed at the time of the entry into of the Employment Agreements. As was the case in OAMPS, the Restraint Clause is concerned with protecting Monarch’s interest in its customer connections by preventing Messrs Puxty and Coggan from using their knowledge of and influence over the clients built up during the course of their employment with Monarch. Similarly, the question is whether, on the whole of the evidence, Monarch has proved circumstances from which reasonableness can be inferred.

The evidence before me is that policies are renewed every 12 months. In those circumstances it seems that a period of 12 months is reasonable to permit Monarch an opportunity to deal with the client and “cement its connection” or to sever Messrs Puxty’s and Coggan’s connection. That is a reasonable period to protect Monarch against solicitation of clients with whom Messrs Puxty and Coggan had contact during their employment and who were not bound to Monarch by contract or stability of association.

Messrs Puxty and Coggan point to the fact that their employment in fact was for a period just over 12 months. That is, they commenced their employment on 7 December 2018, gave notice of their intention to resign on 17 January 2020 (although they had informally notified Ms Coulter of that intention in early November 2019) and their employment ceased at the end of January 2020. However, the question of reasonableness of the Restraint Clause is to be assessed at the time of entry into the Employment Agreements and not at its termination, making these facts irrelevant.

The Restraint Clause, imposing as it does in this case a restraint period of 12 months, is therefore reasonable, valid and enforceable.

The third question: what damages should be awarded to Monarch?

Monarch seeks damages in two categories: loss of profits between 31 January 2020 and completion of the sale of its business on 2 February 2021 (claim 1); and loss of valuable opportunity to sell its business at a higher price than the purchase price arising from the breaches of the Employment Agreements (claim 2). It relies on evidence given by Mr Potter in relation to the quantification of damages for each of claim 1 and claim 2.

The respondents rely on evidence given by Mr Minett. Mr Minett responds to Mr Potter’s report.

I address each of claim 1 and claim 2 in turn.

Legal principles

In Ennis Paint Australia Holding Pty Ltd & Anor v Jimmy Poh Wing Lei & Ors [2015] NSWSC 1933 Sackar J considered the calculation of damages in circumstances where the defendants admitted liability including the first defendant admitting that he breached a restraint imposed on him following sale of a business and a share sale agreement. In undertaking the task of assessing damages, Sackar J first set out the relevant legal principles. Under the heading “Loss of opportunity” his Honour referred to the following authorities at [68]-[70]:

68 The plaintiffs cite a number of cases where claims were made for lost profits as a consequence of a defendant’s breach of restrictive covenants on the basis of the principles articulated in Malec v JC Hutton Pty Ltd (1990) 159 CLR 638 and Poseidon Ltd & Sellars v Adelaide Petroleum [1994] HCA 4; (1994) 179 CLR 332, including Orica Investments Pty Ltd v McCartney [2010] NSWSC 488 at [18] and [26]-[38] (Orica). At [26] of that case, Ball J said:

The parties agree that this issue is to be determined in accordance with the principles set out in cases such as Malec v JC Hutton Pty Ltd (1990) 159 CLR 638 and Poseidon Ltd & Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332 –that is, the parties accept that the Plaintiff’s damages are to be reduced to the extent that there was a chance that the Clos Distributorship would have been terminated irrespective of the Defendants’ breaches. It is relevant to observe that in applying this principle the question is not whether there were causes other than the Defendants’ breaches of Clos’s decision to terminate the Distributorship Agreement. The fact that there were other causes of Clos’s decision to terminate that agreement is not a reason for reducing the damages payable by the Defendants flowing from that event: Heskell v Continental Express Ltd [1950 1 All ER 1033 at 1048 per Devlin J; Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 at 346 per Samuels JA with whom Moffitt P and Reynolds JA agreed on the point; Wylie v The ANI Corporation Limited [2002] 1 Qd R 320 at [27] per McMurdo P and at [48] per Thomas JA. Rather, the question is, assuming that the Defendants were not in breach of their obligations, what was the risk that Clos would terminate the Distributorship Agreement following the acquisition of Bronson & Jacobs by Orica Investments?

69 Orica was reversed on appeal, but no issue was taken concerning Ball J’s statement of the applicable law: McCartney v Orica Investments Pty Ltd [2011] NSWCA 387.

70 In Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46, Handley JA (with whom Mason P and Beazley JA, as her Honour then was, agreed) said at 59:

In my judgment the Court should assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party “whose actions have made an accurate determination so problematic”: see LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (1990) 24 NSWLR 499 at 508.

In Orica Investments Pty Ltd v McCartney [2010] NSWSC 488 Ball J said at [39]:

Lastly, I think that the principle derived from Armory v Delamirie (1722) 1 Stra 505; [1722] EWHC KB J94; 93 ER 664 is relevant in this context. That principle was stated in these terms by Handley JA (with whom Mason P and Beazley JA agreed) in Houghton v Immer (1997) 44 NSWLR 46 at 59:

[T]he Court should assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party “whose actions have made an accurate determination so problematic.” (quoting Hodgson J in Investments Pty Ltd v Howard Chia Investments Pty Ltd (1989) 24 NSWLR 499 at 508)

I do not think that I should readily infer that it was likely that Clos would have left Bronson & Jacobs in the absence of the Defendants’ conduct when that conduct was directed at achieving that very goal. One might well ask why the Defendants did what they did if they thought that Clos would have changed distributors in any event. Mr Sullivan’s answer to that question was to say that their conduct should be seen as an example of abundant caution. But it is clear that they went to considerable lengths to attract Clos away from Bronson & Jacobs. As a consequence of their conduct, it is impossible to know now with any certainty what Clos would have done. That uncertainty should not be allowed to operate in the Defendants’ favour.

As noted in Ennis Paint at [69], Orica was reversed on appeal, but no issue was taken concerning Ball J’s statement of the applicable law: McCartney v Orica Investments Pty Ltd [2011] NSWCA 387.

Monarch submits that these principles should apply to the assessment of damages in this case.

Claim 1: loss of profits

Mr Potter assessed the loss of profit during the Restraint Period, being 1 February 2020 to 31 January 2021, as follows:

(1) the revenue that would have been earned by Monarch from the clients lost to Odyssey during the Restraint Period (referred to as Clients under Restraint); less

(2) the cost that would have been incurred by Monarch to generate the lost revenue. Mr Potter was instructed that there would not have been any additional expenses incurred to service the Clients under Restraint.

On that basis, Mr Potter calculated the loss of profit during the Restraint Period as result of the claimed employment contract breaches to be $132,682. Mr Potter was cross-examined but not in relation to his calculation of claim 1.

In the joint report Messrs Potter and Minett agreed in relation to claim 1:

(1) Mr Potter’s calculation of the loss of profit during the Restraint Period was mathematically accurate, provided the assumptions Mr Potter was instructed to accept are accurate;

(2) on use of the Monarch revenue report for the pre-Restraint Period and the Restraint Period to identify the Clients under Restraint; and

(3) on use of the Odyssey revenue report obtained from Odyssey to calculate the revenue earned from servicing the Clients under Restraint.

Mr Minett took issue in his report with some of the assumptions given to Mr Potter to carry out his calculation for claim 1. But, as Monarch points out, they are not a matter for Mr Minett. Rather the assumptions are to be established by evidence led by Monarch or undermined by evidence relied on by the respondents. To the extent Mr Minett challenges the assumptions I address them below.

First, Mr Minett expresses the view that the remaining employees at Monarch may not have had the expertise and experience to provide the type of financial advice given by Odyssey. Mr Puxty gives evidence to the effect that Monarch’s clients had relatively simple needs i.e. basic insurance and/or superannuation requirements and Ms Coulter’s ability to service clients was and is limited to personal insurance and basic superannuation services. On the other hand, the Puxty Clients principally required more than simple personal insurance or basic superannuation services.

Contrary to Mr Puxty’s evidence, the evidence before me establishes that Ms Coulter has had a more than 20 year career in financial services. Her experience is summarised at [9(1)] above. While she specialises in insurance she is and has been licensed to provide complete financial advice. By way of example, she explains that she has:

(1) serviced a number of clients who are retirees or pensioners in relation to their estate planning and retirement needs;

(2) advised a number of clients about transitioning to retirement;

(3) had business insurance clients which requires understanding the financials and structure of the business and advising on their wealth protection plan via buy/sell and keyperson insurance;

(4) assisted clients set up their self-managed super funds including helping them understand their obligations as trustees of the fund, and helping them manage their cashflow with regards to future property purchases in the fund and ensuring there is adequate protection in the fund by way of insurance; and

(5) set up tax effective investments for clients who wish to invest for their children’s private education, university fees or home deposit.

I am satisfied that Monarch has established its ability, via Ms Coulter, to service the Clients under Restraint.

Secondly, Mr Minett says that there is an issue as to whether Mr Puxty actively pursued the Clients under Restraint or whether those clients contacted Mr Puxty themselves. As Monarch points out, that is not a relevant consideration given the terms of the Restraint Clause (at cl 19(b)) which prohibits Messrs Puxty and Coggan from, soliciting, attempting to solicit, or accepting any instructions to perform work from inter alia any client for whom they provided services during their employment at Monarch.

Mr Minett challenges the assumptions that Monarch would not have required additional resources to service the Clients under Restraint and that it would have earned the same income as Odyssey did during the Restraint Period. However, that ignores Ms Coulter’s unchallenged evidence that after Messrs Puxty and Coggan left Monarch, Ms Miroshnikoff remained as a full time employee and her view that Monarch would not have nave required additional staff to manage those clients as most of them were “review” clients which meant that she would undertake a review of their file and policies yearly (which would take about 30 to 45 minutes), send the relevant information to Ms Miroshnokoff who would prepare a quote and send it back to Ms Coulter to send to the client and, upon sending the quote to the client, Ms Coulter and the client would have a brief discussion about it. Ms Coulter explained that the more extensive work is in new business as it involves more upfront work and most of the administration is done at that time.

Mr Minett also expresses the view that “sensitivities or contingencies” should be applied to some aspects of Mr Potter’s calculation of claim 1, for example advice fee revenue or to the proposition that Monarch would have achieved 100% retention of the Clients under Restraint during the Restraint Period. As to the latter Monarch submits that a 20% reduction should be applied to the overall amounts it claims in relation to claim 1 (and claim 2). This is because it accepts that it is unlikely that “family and friends” of Messrs Puxty and Coggan would have remained with Monarch.

Given the evidence before me and having regard to the concession about “family and friends”, I am satisfied that Monarch has established that it is entitled to damages for claim 1 in the sum of $106,145.60, being the amount calculated for claim 1 by Mr Potter reduced by 20%.

Claim 2: loss of opportunity to sell Monarch business at a higher price

Mr Potter calculated the reduction to the purchase price for the Monarch business by applying the reduction in recurring revenue earned from Clients under Restraint during the Restraint Period to the multiples that were used to arrive at the purchase price pursuant to the sale agreement with Newlane. Although Mr Potter was instructed to perform his calculation on a gross basis (incl of GST), because this was the way the purchase price was calculated pursuant to the sale agreement, he presented his calculations on both a GST inclusive and GST exclusive basis. As a result, he assessed the following amounts as the reduction to the purchase price in the sale agreement:

(1) gross basis – $356,493 (GST incl); and

(2) net basis – $324,080 (GST excl).

In their joint report, Messrs Potter and Minett agreed the following matters:

(1) the mathematical accuracy of the calculation of claim 2 in Mr Potter’s report, provided the assumptions given to Mr Potter, which Mr Potter was instructed to accept and thus are implicit in the calculation, are accurate and correct. Mr Minett has difficulty in accepting the assumptions;

(2) the use of the “Trail Book”, being Sch 4 to the sale agreement, that details the clients by identification number and the revenues attributed as at the date of the sale agreement, as a basis for calculating the reduction to the purchase price;

(3) the application of the multiples used in the sale agreement in determining any reduction in the purchase price; and

(4) the adjustment made to the fees charged (in particular, the fees on superannuation and investments only and the fees received for management of superannuation and/or investments) (Advice Fees Revenue) is likely to be a discrete adjustment and not applicable to the whole client portfolio. Messrs Potter and Minett agreed to disregard the adjustment in the calculation of the Advice Fees Revenue amount included in claim 2.

Mr Potter was cross-examined, principally in relation to some of the assumptions he was instructed to adopt in relation to his calculation of damages for claim 2.

Mr Potter was instructed to undertake the calculation on a GST inclusive basis. Notwithstanding that, as set out above, he undertook the calculation on both a GST inclusive and GST exclusive basis. He accepted that the recipient of a payment that is GST inclusive is under an obligation to remit the GST to the Deputy Commissioner of Taxation for an invoiced sale. Mr Potter had the following exchange with Mr Bedrossian SC:

Mr Bedrossian: You’ve been instructed to assume the GST is part of this transaction; correct?

Mr Potter: That’s correct.

Mr Bedrossian: And so if – and I will just pick round numbers – if the payment required under the contract was $11 inclusive of GST, then the GST component is $1; correct?

Mr Potter: That’s correct.

Mr Bedrossian: And the recipient of that $1 – that is, the recipient of the $11, which included the $1 – has to remit that $1 to the ATO if it is GST; correct?

Mr Potter: If it – that – that would be correct, but there’s an alternate position. I can’t tell you either way which way it is, but there’s an alternate possibility that, for whatever reason, the parties agreed the price would be for a – in respect of a $100 commission from a client, the price paid would be $110 – not meant to be a GST amount, just the way that the price of the transaction was arrived at. … I can’t tell you if that’s the case. I just see it’s a possibility.

Mr Bedrossian: But what that means is, on that – those numbers that you have identified it by way of example, what that means is the agreed price was $110 with no GST?

Mr Potter: Correct.

Mr Bedrossian: But if there is GST, it’s not a loss because it’s remitted to the Commissioner of Taxation?

Mr Potter: If – if there’s a GST amount in the transaction, that’s correct. Yes.

Mr Potter was instructed for the purpose of his report that the transaction for sale of the Monarch business completed and settled on 2 February 2021 and that the purchase price of $720,000 was calculated as at that date. However, the sale agreement provided for a “Deferred Assessment Date” which was the date 15 months after Completion and a “Deferred Purchase Price” which was the amount to be calculated in accordance with the formula at item 10 of Sch 3. Mr Potter accepted that the deferral was a contingent deferral and was calculated based on the number of clients that remained with the business 15 months after its sale i.e. as at 1 May 2022. Mr Potter also accepted that, given his instructions, he did not review the sale agreement for the likelihood of the Deferred Purchase Price component being paid.

In undertaking his calculation for claim 2 Mr Potter accepted that he was not asked to, and thus did not, give any consideration to the risk that some or all of the Clients under Restraint would have been lost by Monarch/Newlane prior to 1 May 2022, the date on which the Deferred Purchase Price was to be paid. That is Mr Potter did not factor into his calculation for claim 2 the risk that some of the Clients under Restraint may not remain with Newlane as at 1 May 2022. He accepted that to undertake the analysis of assessing the risk of those clients remaining or leaving would require a combination of industry specific evidence about client retention and direct evidence in relation to specific clients and expressed the view that it would be a difficult exercise.

Ultimately on this topic Mr Bedrossian SC and Mr Potter had the following exchange:

Mr Bedrossian: And what I’m putting to you is that, shouldn’t you equally feel uncomfortable, at least now, having taken at face value your instructions to assume that all of the clients came across, isn’t – aren’t you at least equally uncomfortable with that process?

Mr Potter: I’m uncomfortable in the sense that you – you would assume as the starting point in a calculation, they do come across. But what I’m comfortable – uncomfortable with is, as you’ve raised, the risk or the potential risk that under the specific Newlane sale agreement there might have been an adjustment for those which ultimately left Monarch. But that – that risk is a difficult calculation, if you have that break in the period where Puxty has contact with the – the clients.

Mr Bedrossian: Well, whether or not it is difficult, and we’ve already identified in my questions and your answers that there are certain evidentiary references that one would need in order to undertake that analysis?

Mr Potter: Yes.

Mr Bedrossian: But whether or not it is difficult you accept, do you not, that that would be – that is, the risk, assessing the risk, would be an essential component to a proper calculation of damages?

Mr Potter: Yes, I do.

Mr Potter was instructed for the purpose of his calculation of claim 2 that the calculation of the purchase price pursuant to the sale agreement did not include new business revenue.

Mr Potter accepted that that the information that was included in the Odyssey Revenue Report (being the report produced by Odyssey that details the revenue earned by Odyssey during the Restraint Period) was the same type of information as in the Monarch revenue report and assumed that they were produced from the same systems. However, in calculating the loss of profit for claim 2 he included new business that was included in the Odyssey Revenue Report. Mr Bedrossian SC and Mr Potter had the following exchange:

Mr Bedrossian: So, you used the totality of these numbers at paragraph 59, including new business, to calculate the amount under the claim 2 calculation; correct?

Mr Potter: That’s correct.

Mr Bedrossian: Including the new business amount?

Mr Potter: Yes. I – well, I – I assumed the new business in the agreement that should be excluded from the sale – that description of new business – to be a different item to the new business that I included in the New Business column here. And if I could take you to the instructions, you will see how I was asked to assume certain types of commissions, even though there – they appear in – as one column that – in the data set that describes them as new business. In another column, they’re described as a particular type of commission, which means they’re ongoing, recurring revenue. So, it’s a different – it’s not the new business exclusion. My understanding is it’s not the new business that’s to be excluded under the agreement; it’s a type of new business that should be included, based on the instructions I was given on how to read the data, if that makes sense.

…

Mr Bedrossian: You assumed it because you were told to assume it?

Mr Potter: Yes

Mr Bedrossian: You were told, “There are items in these revenue reports that say “new business” but don’t treat them as new business”; correct?

Mr Potter: That’s correct.

Mr Potter was instructed to apply a number of assumptions to the Odyssey Revenue Report including:

Column M is a further category of revenue received within the “main type of revenue”. The categories are as follows:

…

iii. “INS1–Initial Comms” refers to upfront commissions received for new business insurance.

“REN–Renewal Comm” refers to ongoing revenue received by the recipient each year a policy is in place.

In cross examination Mr Potter said that he was not told that initial commissions are calculated at a higher rate than renewal commissions, although he noted that Mr Minett raised the issue in the joint report. Mr Potter also accepted that he was not instructed that initial commissions are upfront fees that need to be reimbursed if the client cancels the insurance policy and he was not told that even with a recurring insurance policy, if the premium increased year to year, the amount of the increase is treated as subject to initial commissions, as opposed to renewal commission rates, and this component is treated as new business.

Mr Potter accepted that if the instruction that items identified as new business in the Odyssey Revenue Report should not be treated as new business and that instruction is wrong, that fundamentally affects his calculation of the claim 2 amount. At the conclusion of the cross-examination Mr Bedrossian SC and Mr Potter had the following exchange:

Mr Bedrossian: And you – do you accept now – and, you know, after the course of some questions – that the instructions that you were given were so tight and confined that you really had no scope, nor did you consider matters that – I withdraw the question, your Honour. I apologise. Do you accept that at least some of the assumptions that you were instructed to make now appear to you to be incorrect?

Mr Potter: I – I don’t know how to – to respond to that. It – it – I – when I prepared the report it appeared to me that, because it was driven by assumptions, a lot would depend upon whether – the extent to which those assumptions are proven, and – and I couldn’t tell you what has happened there.

Mr Bedrossian: But on this similar theme, but can I just ask you: do you agree that – weighing all those matters up, that your report does not provide a fair or reasonable assessment of the loss, if any, that’s – that might have been suffered in respect of the sale price of this business sale agreement?

Mr Potter: If there was risk of clients leaving, then you’re correct, yes.

As is apparent Mr Potter was instructed to calculate damages for claim 2 based on a narrow set of assumptions which Monarch has not established on the evidence. In particular, Mr Potter was not given any assumption about the risk of clients leaving the Monarch business or accurate instructions about “initial commissions” and “renewal commissions” (see [32] and [195] above as to the way in which these commission work). These matters infected his calculation of damages for claim 2 such that its reliability has, to an extent, been undermined to establish quantum for claim 2.

Monarch submits that the respondents’ attack on Mr Potter’s calculation are of no effect having regard to the assumption against wrongdoers. In that regard Monarch relies on Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 where Handley JA (with whom Mason P and Beazley JA agreed) said at 59:

In Houghton the appellants (referred to as the defendants) were proprietors in partnership of lots 2 to 5 in a strata plan entitling them to 80% of the aggregate unit entitlement. The first respondent (referred to as the plaintiff) was the proprietor of lot 1 with 20% of the aggregate unit entitlement. The second respondent was the body corporate and did not take an active role in the proceeding. The relevant premises were a five storey building used for commercial purposes which had a flat roof which was common property. The following occurred:

(1) in 1993 the body corporate passed a resolution permitting the defendants to construct new penthouses in lot 5 and in some of the common property on the roof;

(2) in 1995 the body corporate passed a by law which conferred certain privileges on the owners of lot 5 to construct the penthouses and retain the improvements made; and

(3) in 1996 the body corporate passed a special resolution to authorise the subdivision of lot 5 and the common property on the roof into two penthouses and to authorise the body corporate to transfer its interests in the former common property now in the penthouse lots to the partnership for $1.

At first instance, the court found that the 1996 resolution was a fraud on the minority and was voidable in equity. Although the proceeding was commenced in July 1996 before work had finished, the plaintiff did not seek interlocutory relief and thus the defendants were able to complete the construction and register the plan: Houghton at 55. The New South Wales Court of Appeal therefore assessed damages based on the improved value of the space in the lots derived from common property. There was expert evidence relied on by the parties in relation to that assessment.

Having come to that view Handley JA said at 59:

The defendants are entitled to a set-off for the actual cost of the improvements, but there was no evidence of this cost. The accounting issue would normally be referred to a master but the trial was not conducted on this basis. The defendants would have great difficulty in such an inquiry, since no attempt appears to have been made to keep separate records of the cost of constructing the improvements on the common property.

And:

At this stage the Court should only remit the matter to a master as a last resort, if no other course is fairly open. The defendants, having improved common property without lawful authority, and attempted to effect a fraud on the minority, are wrongdoers, and their failure to keep and produce proper accounts of their actual expenditure on the common property has made it difficult to assess the compensation due to the plaintiff: compare Armory v D Delamirie (1722) 1 Stra 505; 93 ER 664. In my judgment the Court should assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party “whose actions have made an accurate determination so problematic”: see LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (1990) 24 NSWLR 499 at 508.

This case is different. The respondents are not seeking a set off nor have they stood in the way of Monarch providing an accurate determination of the damages it seeks for the purposes of claim 2. The respondents are “wrongdoers” to the extent that they have been found to have breached the Restraint Clause. However, they cooperated in providing the necessary evidence to calculate damages for the purposes of that breach. The relevant evidence as to attrition of clients and which underpins the assumptions relied on by Mr Potter was in the control of Monarch. As to the former, Mr Potter’s evidence was that the relevant evidence for assessing the risk of clients leaving Monarch was a combination of industry knowledge about client retention and direct evidence in relation to specific clients. As to the latter, so much is evident from Ms Coulter’s evidence in cross-examination (see [32] above). In those circumstances it is not appropriate for me to take up Monarch’s invitation to resolve “doubtful question(s)” against the respondents in relation to claim 2.

That said, I accept that here the problem is absence of reliable proof of the quantum of damages not the fact of loss. In other words, breach of the Restraint Clause having been established it follows that Monarch suffered loss in that at the time of calculation of the sale price, the revenue from the Clients under Restraint was not included. In Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64, an action for damages for breach of contract, the only question before the High Court was the assessment of damages. In their joint judgment Mason CJ and Dawson J said (at 83) that the settled rule is that “mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can”: see too Brennan J at 102, Toohey J at 135 and Gaudron J at 153.

I am satisfied that this is a case where I am able to undertake a reasonable assessment of the quantification of loss for claim 2 and not one which might require me to “resort to irrational bases for making adjustments”: see Zonia Holdings Pty Ltd v Commonwealth Bank of Australia Limited [2025] FCAFC 63 at [614] (Murphy, Moshinsky and Button JJ). While the reliability of the quantum for claim 2 calculated by Mr Potter has been undermined insofar as it purports to provide absolute certainty of that claim, it provides a starting point.

Mr Potter has calculated the damages for claim 2, being the reduction in purchase price occasioned by the respondents’ breach, as $324,080 exclusive of GST. In my view the GST exclusive calculation is to be preferred over the GST inclusive calculation given that, as Mr Potter accepted, any amount payable for GST is not an amount for damages but is to be remitted to the Deputy Commissioner for Taxation.

I also observe that Mr Potter was not instructed to, and thus he did not, undertake any calculation in relation to the incentive payment under the sale agreement that was paid because, as of May 2022, the number of Monarch’s clients was the same as or more than the number of Monarch’s clients as at February 2021 (see [119] above). Although this issue was briefly ventilated in cross-examination of Mr Potter (see [189] above), neither party made any submission about that payment and whether it would have any impact on the assessment of damages.

The respondents having cast doubt on some of the integers in Mr Potter’s calculation do not assist the Court by providing an alternative quantification. Their expert Mr Minett does not do so, nor does he provide a percentage by which the calculation of claim 2 might be reduced in light of the uncertainties. Monarch proffered that a reduction of 20% should be applied for “friends and family” who would in any event have left Monarch following Messrs Puxty’s and Coggan’s departure. In addition, having regard to the undermining of some of the assumptions given to Mr Potter and the fact that the assessment does not factor in the possibility of attrition in the Clients under Restraint by their departure from Monarch in the ordinary course of business I would reduce Mr Potter’s calculation by a further 20%. Thus, the damages for claim 2 are assessed as $194,448.

CONCLUSION

Monarch is entitled to judgment in the sum of $270,593.60 being the amount of its damages for claim 1 and claim 2 less $30,000 (being that component of the Amended CC which Monarch did not oppose) and interest on that amount pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth).

Given the way in which Monarch ultimately conducted its case, in particular its late abandonment of most of its pleaded claims, and its approach to the Amended CC, and the extent of its success, I will reserve on the question of costs.

The parties should provide my Associate with draft orders giving effect to these reasons and, if agreement can be reached, on the question of costs within 14 days of their publication. If they cannot agree, including in relation to the date from which interest should run and the question of costs, they should provide their competing orders by that date together with submissions, not exceeding three pages, addressing the areas of disagreement. The proceeding will thereafter be listed for case management hearing to resolve any differences and make final orders. “