New South Wales Supreme Court CITATION : Koops Martin v Dean Reeves [2006] NSWSC 449 HEARING DATE(S) : 04/04/2006, 05/04/2006, 06/04/2006 JUDGMENT DATE : 29 May 2006 JURISDICTION : Equity Division JUDGMENT OF : Brereton J DECISION : 1. Order that until 7 November 2006 the defendant be restrained from, within the city of Coffs Harbour on his own account or on behalf of or in association with others, directly or indirectly: (a) approaching or enticing or endeavouring to entice away from Koops Martin Financial Services Pty Limited any persons, firms or companies who were clients of Koops Martin Financial Services Pty Limited listed on Exhibit PX03; (b) accepting any instructions to perform any financial planning or advisory work for any such person. 2. Order that the cross-claim be dismissed. 3. Order that the defendant pay the plaintiff's costs. 4. Order that time within which a notice of appeal or an application for leave to appeal as appropriate may be filed be extended to the 28th day from this date. 5. Order that the exhibits be returned at the expiration of 28 days unless notice of appeal or an application for leave to appeal has been filed within that time. CATCHWORDS : RESTRAINT OF TRADE – Employer and employee – customer connection – financial planner – construction of restraint – where purpose of restraint stated to be protection of confidentiality of business operations – whether statement of purpose limits plain words of restraint which protect customer connection – held, they do not - Validity – nature of customer connection – significance of some customers being personal relatives or friends of employee - significance of employee's role including building of customer base – whether protectable interest where employer had purchased some clients, paid referral fees for others and received "trail commission" for their managed investments and paid bonus to employee for efforts in developing business – whether protectable interest where employee dealt directly with clients as their financial planning consultant – Reasonableness – whether restraint excessive insofar as it prohibited dealing with customers other than those with whom employee personally dealt – whether restraint excessive insofar as it prohibited dealing with clients of divisions of business group other than the business in which employee was engaged – whether restraint was excessive insofar as it prohibited not only soliciting but accepting instructions from customers of employer - Area – Duration – whether manifest failure to attempt to make restraint a reasonable one Contracts Review Act 1980 (NSW) LEGISLATION CITED : Industrial Relations Act 1996 (NSW), s 106 Restraints of Trade Act 1976 (NSW), s 4(1), (2), (3) Arthur Murray Dance Studios of Cleveland Inc v Witter 105 NE (2d) 685, 706 (Ohio, 1951) Attwood v Lamont [1920] 3 KB 571 Austin Knight (UK) Limited v Hinds [1994] FSR 52 Bridge v Dawes [1984] 1 AC 705 Buckley v Tutty (1971) 125 CLR 353 Business Seating Renovations Ltd v Broad [1989] ICR 729 Butt v Long (1952) 88 CLR 476 Commercial Plastic Limited v Vincent [1964] 3 WLR 820 Commissioner of Inland Revenue v Raphael [1935] AC 96 Connors Brothers Limited v Connors [1940] 4 All ER 179 Coote v Sproule (1929) 29 SR (NSW) 578 Croft v Hawe (1836) Donnelly 82, 47 ER 241 Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 Daly Smith Corporation (Australia) Pty Limited v Cray Personnel Pty Limited (NSWSC, Young J, 14 April 1997, unreported) Dewes v Fitch [1920] 2 Ch 159 Fitch v Dewes [1921] 2 AC 158 G W Plowman & Sons Limited v Ash [1964] 1 WLR 568; [1964] 2 All ER 10 Geraghty v Minter (1979) 142 CLR 177 GFI Group Inc v Eagleston [1994] FSR 535 Harlow Property Consultants Pty Limited v Byford [2005] NSWSC 658 Henry Leetham & Son v Johnston-White [1907] 1 Ch 322 Herbert Morris Ltd v Saxelby [1915] 2 Ch 57; [1916] 1 AC 688 Hitchcock v Coker (1837) 6 Ad & El 438; [1835-42] All ER Rep 452 Home Counties Dairies Limited v Skilton [1970] 1 All ER 1227, [1970] 1 WLR 526 I F Asia-Pacific Pty Limited v Galbally (2003) 59 IPR 43 KA & C Smith Pty Limited v Ward (1998) 45 NSWLR 702 CASES CITED : Kone Elevators Pty Limited v McNay (1997) ATPR 41-564 Konski v Peet [1915] 1 Ch 530, 539 Lindner v Murdoch's Garage (1950) 83 CLR 628 Littlewoods Organisation Limited v Harris [1977] 1 WLR 1472 Love v Miami Laundry Co 160 So 32 (Fla, 1935) Mackenzie v Duke of Devonshire [1896] AC 400 Marquett v Walsh (1929) 29 SR(NSW) 298 Mason v Provident Clothing & Supply Co Limited [1913] AC 724 McGuigan Investments Pty Limited v Dalwood Vineyards Pty Limited [1970] 1 NSWR 686 Mills v Dunham [1891] 1 Ch 576, 589-90; Morris & Co v Ryle (1910) 103 LT 545 Morse v Fowler (1899) 44 Sol Jo 89 Nordenfelt v Maxim Nordenfelt Guns & Ammunition [1894] AC 535 Normalec Limited v Britton [1983] 9 FSR 318 O'Loughlin v Mount (1998) 71 SASR 206 Office Angels Limited v Rainer-Thomas [1991] IRLR 214 Orton v Melman [1981] 1 NSWLR 583 Ridley v Krout 180 P 2d 124 (Wyo, 1947) Scorer v Seymour-Jones [1966] 1 WLR 1419 Sharah v Healey [1982] 2 NSWLR 223 Smith v Ryngiel [1988] 1 QdR 179 Stenhouse Australia Limited v Phillips [1974] AC 391 Tank Lining Corporation v Dunlop Industrial Pty Ltd (1982) 140 DLR (3d) 659 Twenty-First Australia Inc v Shade (NSWSC, Young J, 31 July 1998, unreported, BC9803667 Vanderwell Products Limited v McLeod [1957] RPC 185 Woolworths Limited v Olson [2004] NSWCA 372 Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 PARTIES : Koops Martin Financial Services Pty Limited (formerly Koops Martin Financial Services Limited) ABN 23 098 362 246 (P) Dean Reeves (D) FILE NUMBER(S) : SC 2005/06336 COUNSEL : J Fernon SC with D Hand (P) P Russell (D) SOLICITORS : L S Juhasz of Koops Martin Lawyers (P) W J Langler of MBT Lawyers (D) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRERETON J Monday 29 May 2006 6336/05 Koops Martin Financial Services Pty Limited (formerly Koops Martin Financial Services Limited) v Dean Reeves JUDGMENT 1 HIS HONOUR: The defendant Dean Reeves was employed by the plaintiff Koops Martin Financial Services Pty Limited ("Koops Martin") as a financial planner. His contract of employment included a restraint by which he undertook that, for a period of twelve months from the termination of his employment, within the city of Coffs Harbour, directly or indirectly, on his own account or in association with others, he would not accept any instructions to perform any financial planning or advisory work for any person who is or was a client of the Koops Martin Group ("the Group") in the twelve month period before such termination. On 8 November 2005, Mr Reeves left Koops Martin for a competing firm, MBT Financial Services Pty Limited, where he commenced employment on 10 November 2005. At MBT, he has accepted instructions to perform financial planning and advisory work for a number of persons who were clients of Koops Martin during the period of the twelve months prior to his departure from that firm. Koops Martin claims injunctive relief in terms of the restraint in the employment contract. Mr Reeves resists the claim, and cross-claims for an order under Restraints of Trade Act 1976 (NSW), s 4(3) that the restraint be invalid. 2 The main issues are: · Does the restraint operate only to protect the confidentiality of the business operation of Koops Martin, or does it also protect customer connection ("the construction issue")? I conclude that it extends to the protection of customer connection; · Insofar as the restraint purports to protect customer connection, is it excessive and contrary to public policy ("the validity issue")? I conclude that it is not; and · Has there been a manifest failure to attempt to create a reasonable restraint and if so, what if any order should be made pursuant to s 4(3) ("the s 4(3) issue")? I conclude that there has not been such a failure, and that no such order should be made. Mr Reeves' employment with Koops Martin 3 The restraint is contained in a letter agreement dated 8 May 2003 and accepted by Mr Reeves on 22 May 2003. The letter recorded that Mr Reeves was to be employed as a financial planner with a start date of 28 April 2003 on a salary of $40,000 per annum plus superannuation and leave loading. It provided for termination by one month's notice, and included a confidentiality clause, and the restraint, which was in the following terms: Restraint You covenant that you will not, for a period of twelve (12) months from the termination of your employment, for any reason, within the city of Coffs Harbour, directly or indirectly, on your own account or on behalf of or in association with others: Approach or entice or endeavour to entice away from the company any person, firm or company which was at any time during the 12 months before the termination of your employment, a client of the Koops Martin Group; Accept any instructions to perform any financial planning or advisory work for any person who is or was a client of the company in the 12 month period before such termination; Accept any employment which would require you to reveal any confidential information of the Koops Martin Group This restraint is not intended to prevent you from working in Coffs Harbour after termination for any similar business. It is aimed at protecting the confidentiality of its business operations. 4 While the second limb of the restraint, pertaining to the acceptance of instructions, refers to clients of "the company" – which means the plaintiff, Koops Martin Financial Services Pty Limited, which I have called "Koops Martin" – the first and third limbs refer to the Group. The Group comprises several entities, of which the financial services company is but one; others include a mortgage broking practice, an accountancy practice, and a law firm. Mr Koops is the principal of the Group. 5 Mr Reeves had already commenced working for Koops Martin before he was presented with the employment contract for signature. Though he was young, he had once before had a formal employment contract (when with the National Australia Bank), and understood that it was an important document and set out his terms of employment. He was afforded an opportunity to, and did, read it, and though he says that he did not pay any particular attention to the restraint, he does not suggest that he was unaware of it. He did not seek or obtain any advice, and having signed it, returned it to Mr Koops, understanding that by signing it he had accepted the terms that it contained. 6 Mr Reeves worked for Koops Martin under supervision until January 2004, when having completed his Diploma of Financial Services and qualified to be an Authorised Representative, he began to deal with clients directly. By 2005, he and one other financial planner, Mr Corkill, were sharing the client load. According to Mr Reeves, he was servicing about 400 investment clients and 300 insurance clients. Data extracted by the plaintiff's managing director, Mr Malouf, from its records, which became PX03, shows that in the twelve months prior to 8 November 2005, Mr Reeves had contact of some sort with clients in respect of just over 600 client accounts which were serviced by him (as distinct from with Mr Corkill). Although in some cases there were multiple accounts for one client, PX03 nonetheless contains a convenient record of those clients of Koops Martin for whom Mr Reeves was responsible and with whom he had contact in the twelve months preceding his departure. 7 Mr Reeves' role, as described by him in his affidavit, was "to service and grow an allocated book of clients", which had continued to expand with the departures of other financial planners from the employ of Koops Martin. The majority of the clients for whom he managed investments had previously had their investments managed by Mr Malouf for the two to three years before Mr Reeves joined the practice; before that, they had been clients of Trevor Blay, whose practice Koops Martin had acquired. Mr Reeves sent to each of his 400-odd investment clients who had invested in superannuation funds through the investment platforms used by the firm, a copy of each quarterly report on their investments; he responded to their telephone inquiries; he identified approximately 20 whose files and investments he attempted to review on a monthly basis, which sometimes resulted in contact with the client; and he tried to see the 200 largest clients (who together had about $20-22 million under investment) at least once a year, though he thinks that in the twelve months preceding his departure he saw about 80 percent of those 200. So far as the insurance clients were concerned, he responded to their inquiries from time to time; there were about fifty whose insurances he endeavoured to review, and whom he endeavoured to meet at least once a year to discuss their insurances. He spent about 60 percent of his time on client contact, and the remainder attempting to pursue new clients, and new funds under management from existing clients. 8 From the first half of 2004 onwards, Mr Reeves made presentations at quarterly seminars conducted by Koops Martin which were usually attended by 60-70 clients, not limited to those serviced by him. 9 In July 2004, Mr Reeves asked for a salary review, and Mr Koops invited him to make a detailed submission on his performance, covering inter alia his success in attracting new business and its value, and Mr Reeves' ability to retain and service existing clients. Mr Reeves' response referred to having established a promising third party referral source that to date had up to nine insurance proposals completed or nearing completion (a reference to Mr Eichmann, a contact who Mr Reeves cultivated as a source of referrals to Koops Martin), and asserted that he had sought more referral sources to maintain a continuing in-flow. He proposed a business plan which identified his opportunities as including internal referrals (from elsewhere in the Group), his existing client base and "external sources"; and he proposed to contact and review at least half of his existing client base throughout the year, and to "conduct seminar/workshops to drive business to internal and external clients". In June 2005 he was the subject of a further salary review, as a result of which he received a bonus of $20,000, having regard amongst other things to the new business that he had brought to the firm. 10 Prior to 7 November 2005, Mr Reeves was offered a position with MBT. That day, he tendered his resignation; the following day, 8 November, Mr Koops asked him to leave immediately. He commenced employment with MBT on 10 November, in offices located 150 metres away from Koops Martin. By 14 November, advertisements for MBT that featured Mr Reeves were appearing in the local press. The alleged breaches 11 Since he has been at MBT, Mr Reeves has been approached by about 30 persons who were clients of Koops Martin. He has accepted instructions from some of them. There is nothing that contradicts his evidence that in each case the initial approach has come from the client and not from him, and that in each case he has informed the client of the restraint - except insofar as it would prevent him from accepting instructions, as distinct from soliciting or enticing. 12 Mr Fernon SC, who with Mr Hand appears for Koops Martin, submitted that by responding to initial approaches and following them up by interviewing clients and obtaining authorities to act for them, Mr Reeves "enticed" them away from Koops Martin in breach of the first limb of the restraint. I do not accept that submission. Accepting instructions to act for former clients who initiate contact with the departed employee is not within the concept of "solicitation" or "enticement", which involve action initiated by the former employee, as distinct from responses to approaches from former customers. In Austin Knight (UK) Limited v Hinds [1994] FSR 52, Vinelott J (at 59) rejected an argument that submitting an offer or making a presentation to a former customer who had approached the employee's new employers, or who put out work for tender, amounted to soliciting or endeavouring to entice away the customer:- That is not I think, comprehended in the usual meaning of soliciting, and as regards endeavouring to entice a customer away, if Mr Griffiths' submission were well founded the covenant would amount to a covenant not to deal with customers of AK(UK), even customers with whom Miss Hinds had never dealt while an employee of AK(UK) and with whose relationship with AK(UK) she was wholly unaware. On that construction the covenant would amount in substance to a contract without territorial limit not to take employment in the field in which she had been previously employed and would plainly be an unreasonable restraint. 13 Mr Fernon also submitted that, at least in connection with two clients, Mr and Mrs Bellamy, Mr Reeves had used confidential information of the Group, being information about the affairs of those clients which he had derived when acting for them at Koops Martin. I do not accept that submission. Mr Reeves says, and there is no reason to doubt, that he started afresh with the Bellamys, taking a fresh set of instructions as to their financial affairs. In any event, information about the Bellamys' position was the confidential information of the clients – the Bellamys – rather than of Koops Martin or the Group. 14 Mr Fernon did not submit that it was a contravention of the third limb of the restraint for Mr Reeves to accept employment with MBT, and there is nothing in his contract of employment with MBT that would require him to reveal confidential information of the Group. I would not find that Mr Reeves has accepted any employment that would require him to reveal any confidential information of the Koops Martin or the Group, nor that there is any risk that he would do so. 15 However, Mr Reeves has unquestionably accepted instructions to perform financial planning and/or advisory work for persons who were clients of Koops Martin in the twelve month period before the termination of his employment there, and I find that unless restrained he will continue to do so; Mr Russell, who appears for Mr Reeves, did not – and on the evidence could not – submit to the contrary, rather attacking the meaning or validity of the restraint. 16 In New South Wales, one approaches this type of case by determining, first, whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed; secondly, whether the restraint in its application to that breach is against public policy; and thirdly, if it is not, then in its application to the alleged infringing conduct, the restraint is valid unless the court makes an order under Restraints of Trade Act, s 4(3) [Orton v Melman [1981] 1 NSWLR 583; Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317; Woolworths Limited v Olson [2004] NSWCA 372, [42]]. That is because the effect of the Restraints of Trade Act, s 4(1) is to require that, for the purpose of determining the validity of a restraint, attention be focussed on the actual or apprehended breach, rather than on imaginary or potential breaches. The Construction Issue 17 Mr Russell, for Mr Reeves, submits that properly construed the restraints operate only to protect the confidentiality of the business operations of the Koops Martin and/or the Group. He submits that, having regard to the last two sentences contained in the restraint clause, the restraint, properly construed, does not protect any supposed customer connection or goodwill of Koops Martin, with the result that Mr Reeves is entitled to solicit, entice and accept instructions from persons who are or were clients of Koops Martin, so long as in doing so he does not breach the confidence of the business operations of Koops Martin. 18 A restraint is construed for the purposes of ascertaining its real meaning independently of the rules prescribing tests of reasonableness for the purpose of ascertaining its validity [Butt v Long (1952) 88 CLR 476, 487; Geraghty v Minter (1979) 142 CLR 177, 180]. Nonetheless, where there is ambiguity, a covenant in restraint of trade in an employment contract will be construed in favour of the employee, so that a narrower construction of the scope of a restraint will be preferred to a broader construction when both are reasonably available [Mills v Dunham [1891] 1 Ch 576, 589-90; Vanderwell Products Limited v McLeod [1957] RPC 185, 193; Littlewoods Organisation Limited v Harris [1977] 1 WLR 1472, 1486; Butt v Long, 487], though this does not authorise a restrictive interpretation of general words simply to save a covenant from invalidity for contravention of public policy [Butt v Long, 487; I F Asia-Pacific Pty Limited v Galbally (2003) 59 IPR 43, [108]]. In Australia, Butt v Long precludes the more liberal approach to construction of restraints adopted by Lord Denning MR in Littlewoods, by which courts construe wide words narrowly, so as to make the clause reasonable and therefore enforceable, interpreting them from the perspective that the parties' object is legality, and, if the words of the restraint are so wide that on a strict construction they cover improbable and unlikely events, declining to enforce it in respect of such events. However, Butt v Long is not inconsistent with the view that a covenant in restraint of trade should be construed, in the case of ambiguity, in favour of the employee; that is to say, in favour of giving it a narrower rather than a wider operation [Butt v Long, 487]. 19 Mr Russell's argument derives some support from the judgment of the Court of Appeal (Sir Christopher Slade, Butler-Sloss and Mann LJJ concurring), in Office Angels Limited v Rainer-Thomas [1991] IRLR 214. Office Angels was an employment agency, and the largest part of its business was the supply of temporary workers to client firms. The business with the client firms was generally conducted by telephone, but the temporary workers visited the office on a regular basis, tending to register with the branch serving the area in which they wished to work. The contracts of employment of Office Angel's staff included a clause headed "Protection of goodwill" which provided (emphasis added): "In the course of his or her employment by the company the employee has dealings with clients of the company and in order to safeguard the company's goodwill the employee agrees" not for six months following termination (1) to solicit custom from, deal with or supply, in connection with the trade or business of an employment agency, any person who was a client of the employer during the employment, or (2) be engaged in the business of an employment agency within a radius of 3 kilometres of the branch of the company at which he was employed, or 1 Kilometre in the case of branches in Greater London. The defendants left Office Angels' employment and set up a competing employment agency. At first instance it was held that Office Angels' base of temporary workers on which it drew to supply workers to its clients was a legitimate subject of protection. The Court of Appeal agreed that such a connection was one that an employer was entitled to protect, the covenant did not do so, because its introductory words indicated that its purpose was simply to protect Office Angels' trade connection with its clients. Slade LJ said (at [39]): In a case where the wording of a covenant restricting competition by an employee after leaving his employer's service does not specifically state the interest of the employer which the covenant is intended to protect, the court is, in my judgment, entitled to look both at that wording and the surrounding circumstances for the purpose of ascertaining that interest, by reference to what would, objectively, appear to have been the intentions of the parties. However, in a second category of case where the employer, who proffers the covenant for the employee's acceptance, chooses specifically to state the interest of the employer which the covenant is intended to protect, the employer is not, in my opinion, entitled thereafter to seek to justify the covenant by reference to some separate and additional interest which has not been specified. An employee who is invited to enter into a covenant of this kind may wish to take legal advice as to its validity and effect before he accepts it. His legal advisers will, in my opinion, be entitled to give him such advice on the basis of the stated purpose of the covenant, if any such purpose is stated. 20 But unlike in Office Angels, where the purpose of the restraint was stated in an operative provision, in this case the last two sentences of the restraint clause are in effect an "object clause", providing context for the construction of the restraint, but not so governing its operative parts as to justify disregarding them where they are unambiguous. The "object clause" serves a similar function to a recital, and where the operative parts of a contract are clear and unambiguous, they should not be read down or read contrary to their express terms, even if inconsistent with a recital [O'Loughlin v Mount (1998) 71 SASR 206, 217-8 (Lander J, Cox and Bleby JJ concurring). One of the cases to which Lander J referred was Commissioner of Inland Revenue v Raphael [1935] AC 96, which in turn had referred to Mackenzie v Duke of Devonshire [1896] AC 400, in which Lord Watson explained that narrative words do not detract from unambiguous operative provisions (at 407): The narrative words come to no more than this; "my intention is to do" so and so, and you may add this, "and I have accomplished that purpose by the provisions which follow". In such a case the safer and only legitimate course is to look to the provisions which follow, and to read them according to their natural and just construction. 21 Lord Davey added (also at 407) that it was a settled principle of law that the operative words of a deed expressed in clear and unambiguous language were not to be controlled, cut down or qualified by a recital or narrative of intention. 22 There is another distinction with Office Angels. In that case, the whole of the restraint was explicable by reference to the stated purpose, namely protection of customer connection, without needing to invoke as one of its purposes the protection of the connection of the employer (a provider of temporary office assistance) with the pool of temporary workers on which it drew for that purpose – for which purpose the employer was seeking to invoke the restraint at the trial. But in the present case, the first two limbs of the restraint are not sensibly explicable by reference to protection of confidential information. They have nothing to do with confidential information, and everything to do with customer connection. Were it not for the "object" statement, there would not be the slightest doubt that they were directed to the protection of customer connection. On the construction for which Mr Russell contends, they would have no meaningful work to do. 23 Moreover, it may be that the plain terms of the restraint can be reconciled with the object clause. The purport of the object clause is negative - to clarify that the restraint is not intended to prevent Mr Reeves from working in Coffs Harbour for any similar business, rather than positively to describe exhaustively what the restraint is intended to achieve. It may be that the reference to "confidentiality" in the second sentence of the object statement was intended to bear a rather wider meaning than is usually given to "confidential information", so as to include "goodwill"; and it may be that the object statement was intended only to govern the third limb of the restraint, although this does not sit well with the circumstance that the entire clause is headed "restraint", and the object statement refers to "this restraint". But I do not rely on those possibilities: without resorting to them, the plain words of the first two limbs of the restraint are such that they must be understood as intended to protect customer connection, and prevail over the object clause to the extent of any inconsistency. 24 In my opinion, therefore, the first two limbs of the restraint, properly construed, prohibit Mr Reeves from soliciting or enticing away from Koops Martin any person who was a client of the Group in the twelve month period before 8 November 2005, and from accepting instructions from persons who were clients of Koops Martin during that period, and are not limited to solicitation, enticement or acceptance of instructions which would result in some breach of confidentiality of Koops Martin's or the Group's business operations. The Validity Issue - approach 25 Mr Russell submits that if the restraint is construed as operating beyond the protection of confidentiality to extend to protection of customer connection, there was no sufficient customer connection between Mr Reeves and Koops Martin's clients to justify a restraint, but that if there were any such a connection, then the restraint is excessive in several respects. 26 At common law, a restraint of trade is contrary to public policy and void, unless it is justified by the special circumstances of the particular case, for which purpose it is sufficient justification that the restriction is reasonable having regard to the interests of the parties concerned and in reference to the interests of the public, so that while affording adequate protection to the party in whose favour it is imposed, it is not injurious to the public [Nordenfelt v Maxim Nordenfelt Guns & Ammunition [1894] AC 535, 565; Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 706, 707; Lindner v Murdoch's Garage (1950) 83 CLR 628, 653]. While the cases refer to "special circumstances" justifying a restraint, that means no more than the facts of a particular case from which reasonableness can be inferred [J D Heydon, The Restraint of Trade Doctrine, 2nd edn, p29]. If the restraint is not reasonable with reference to the interests of the parties and the public, it is contrary to public policy [Buckley v Tutty (1971) 125 CLR 353, 376]. The doctrine reconciles two conflicting policies, the first being "that a man should be free to use his skill and experience to the best advantage and should not be put in the position of a slave", and the second that covenants should be observed and enforced [Herbert Morris Ltd v Saxelby [1915] 2 Ch 57, 76; Attwood v Lamont [1920] 3 KB 571, 577]. 27 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, s 4(1)]. 28 While the same general principle applies in all cases of restraint of trade, a more rigorous approach is applied to restraints in employment contracts than in contracts for the sale of goodwill [Nordenfelt, 566; Mason v Provident Clothing & Supply Co Limited [1913] AC 724, 731, 738; Herbert Morris Limited v Saxelby]. A stricter and less favourable view is taken of covenants in restraint of trade between employer and employee than in commercial agreements [Geraghty v Minter, 185; Heydon, pp 68-69; Woolworths Limited v Olsen, [38]]. An employer is not entitled to be protected against mere competition; the legitimate interests of an employer which may be the subject of protection by covenant are in the nature of proprietary subject matter [Vanderwell Products Limited v McLeod, 192; Tank Lining Corporation v Dunlop Industrial Pty Ltd (1982) 140 DLR (3d) 659, 664], including the employer's trade secrets and confidential information, and the employer's goodwill including customer connection. Given the absence in this case of any actual or threatened breach of confidence, and that Koops Martin seeks to enforce the restraint on accepting instructions from those who were its clients apart from any question of confidence, it is customer connection that is relevant here. In that regard, the validity of the restraint depends on two questions: · Does Koops Martin have a protectable interest based on customer connection; and · If so, is the restraint no more than reasonable for the legitimate protection of that interest. The Validity Issue - Protectable Interest in Customer Connection 29 As to the first, it is well established that an employer has an interest in its goodwill and customer connection, which can support a reasonable restraint of trade. Goodwill, of which customer connection is the essence, is akin to a proprietary interest, as Tindal CJ explained in Hitchcock v Coker (1837) 6 Ad & El 438, 454; [1835-42] All ER Rep 452, 456-7: The goodwill of a trade is a subject of value and price. It may be sold, bequeathed, or become assets in the hands of the personal representative of a trader. And, if the restriction as to time is to be held to be illegal, if extended beyond the period of the party himself carrying on the trade, the value of such goodwill, considered in those various points of view, is altogether destroyed. If, therefore, it is not unreasonable, as undoubtedly it is not, to prevent a servant from entering into the same trade in the same town in which his master lives, so long as the master carries on the trade there, we cannot think it unreasonable that the restraint should be carried further, and should be allowed to continue if the master sells the trade, or bequeaths it, or it becomes the property of his personal representative; that is, if it is reasonable that the master should by an agreement secure himself from a diminution of the annual profits of his trade, it does not appear to us unreasonable that the restriction should go so far as to secure to the master the enjoyment of the price or value for which the trade would sell, or secure the enjoyment of the same trade to his purchaser or legatee, or executor. 30 While the employer is not entitled to be protected against mere competition by a former employee, the employer is entitled to be protected against unfair competition based on the use by the employee after termination of employment of the customer connection which the employee has built up during the employment – which, because the employee has in effect represented the employer from the customer's perspective during the employment, might at least temporarily appear attached to the employee, but in truth belongs to the employer. The employer is entitled to be safeguarded against use after termination by the employer of special knowledge of or influence over customers gained as a result of customer contact during the employment. Thus in Herbert Morris v Saxelby, Lord Parker (at 709) said that a covenant was upheld to protect an employer from, amongst other things, a former employee's influence over customers. In Dewes v Fitch [1920] 2 Ch 159, Warrington LJ said (at 181) that an employer was entitled to protection against the influence acquired by the employee over the customers or clients. In Coote v Sproule (1929) 29 SR (NSW) 578, Harvey CJ in Eq said that what was entitled to protection was customer connection through a special relationship between employee and customer as a consequence of the employment (at 580): An employer is entitled to hold his employee to an agreement not to injure the former's business connection by virtue of the special relationship which has existed between the employee and the employer's customers as a consequence of his employment. 31 And in Lindner v Murdoch's Garage, Latham CJ (with whom on this issue Webb J agreed) identified the protectable interest as trade connection and goodwill through the employee's personal contact with customers (at 633-634): Where an employee has access to trade secrets or other confidential information he may be restrained by agreement from communicating those secrets or such information to other persons, and particularly to competitors in trade with his employer. Again, an employee who is brought into personal contact with the customers of his employer may by agreement effectively bind himself to abstain after his term of service has been completed from soliciting the customers of his former employer. In these cases the covenant in restraint of trade is not a covenant against mere competition but is a covenant directed to securing a reasonable protection of the business interests of the employer, and in the circumstances is not unjust to the employee. The interest which can validly be protected is the trade connection, the goodwill of the business of the employer. 32 In the same case, Fullagar J referred to close relations with customers as giving rise to a protectable interest (at 650): There may, of course, be cases in which the employer has no interest which can be legitimately be protected by any covenant in restraint of an employee's trade. But, generally speaking, if there is an interest which may legitimately be protected – whether because the employee will learn trade secrets or because he will come into close relations with customers or for any other reason – that interest may be protected not merely by a covenant against the unfair use and advantage as such but, within limits which will be jealously scanned to see that the restraint goes no further than is reasonably necessary, by a covenant restricting the actually carrying on of a trade or occupation. 33 Kitto J (at 654) said that the employer was entitled to protection for their business connection against the possibility of its being affected by the personal knowledge of and influence over the customers which the employee might acquire in the course of the employment, and that the knowledge which an employer may require his employee to abstain from using - because its use may deprive the employer of the business connection which he is entitled to preserve as his own - is objective knowledge of customers, their peculiarities, their credit and the like. 34 It is often said that a restraint to protect such an interest will be appropriate if and only if the employee has become, vis-a-vis the client, the "human face" of the business – that is, the person who for the customers, represents the business; or, as it was put by Hoover J in Arthur Murray Dance Studios of Cleveland Inc v Witter 105 NE (2d) 685, 706 (Ohio, 1951): "The personal relation between the employee and the customer [is] such as to enable the employee to control the customer's business" [Twenty-First Australia Inc v Shade (NSWSC, Young J, 31 July 1998, unreported, BC9803667, 12]. 35 Typically, that will be the case where the employee is a professional who has confidential dealings with those clients of the firm with whom he or she deals. Although it always depends on the particular facts, a particular solicitor, accountant, or doctor with whom a client deals may well, from the perspective of the client, be for all practical purposes the person whose advice they seek, and thus the persona of the firm. 36 Mr Russell argues that an employee's individual skill and persuasive manner, and friendship, social acquaintance or family connection with customers, do not support a restraint, even though those friends, acquaintances and relations are customers of the employer. This submission is based on a statement to that effect by Mr Heydon, as his Honour then was, in The Restraint of Trade Doctrine, 2nd Ed, p 100, under the heading "Friends", as follows: One important point to note is that just as the customer contact necessary to support a restraint must result from something more than the employee's individual skill and persuasive manner [ Croft v Hawe (1836) Donnelly 82 (covenant not appropriate for waitresses)], so the employee's normal friendships and social acquaintances are not support for any restraint, even if these relations are with the employer's customers [ Ridley v Krout 180 P 2d 124 at 132 (SC Wyoming, 1947)]. 37 That statement is echoed in a dictum of Young J (as his Honour the Chief Judge then was) in Twenty-First Australia Inc v Shade: The fact that the employee has been extremely pleasant to customers so that in the natural course of events the customer might prefer to deal with him or her is usually considered not to be a result deriving from any property or property rights of the employer, but because of the employee's ingratiating personality, in which the employer acquires no property interest: Love v Miami Laundry Co 160 So 32, 36 (Florida) (1935). 38 The authoritative basis for these propositions, when closely examined, is, however, slight. The first case referred to by Heydon is Croft v Hawe (1836) Donnelly 82, 47 ER 241, in which it was held that a restraint binding three sisters who were waitresses was oppressive, but beyond that says nothing to support the proposition. It is not difficult to see, in any event, that the customer connection the case of a restaurant is rather with the establishment, or perhaps with chef, than with the waitresses. 39 Chronologically, the next case - referred to by Young J in Twenty-First Australia, was Love v Miami Laundry Co 160 So 32 (Fla, 1935), in which the Supreme Court of Florida held that a laundry company was not entitled to an injunction restraining its former truck drivers from violating a one year restraint on soliciting patronage of its customers for a competitor, in view of the probable unemployment which would result from granting an injunction. An additional reason was expressed, by Buford J, speaking for the Court, as follows (at 36):- It occurs to us that a considerable amount of the reasoning upon which courts of equity have based the right to injunction in cases somewhat like this has had its origin in the premises that the employee by reason of his employment had acquired something from the employer in the way of a trade secret which he would for a limited time and in a designated territory be prohibited from using for his own benefit. We do not think such premise is established by the allegations of the bill in this case, or that it was established in many of the reported cases where it has constituted the basis of decisions. If the driver of a laundry truck gains such friendships and confidence amongst customers that the customers will change laundries when the driver changes employment, it is not because of the use of any property or property rights of the laundry owner, but it is because of the driver's God-given, or self-cultivated, ingratiating personality, and to this the employer acquires no property interest. A laundry, or a dairy, or an ice plant, acquires no more special right to the patronage of certain customers than does any other tradesman. The time may have been when the use of steam laundries, milk, and ice was so limited that the patrons of such were deemed to be folks apart from the masses, and, therefore, an acquaintance with them and list of their names and addresses constituted a thing of peculiar value to the tradesmen who acquired such information, but that day is past, if it ever existed, because the patronage of the laundry and the use of ice and milk is almost universal, and in any municipality the city directory is a fair list of customers for such enterprises. So neither the laundry, nor the ice plant, nor the dairyman of this day may claim any special property right in a customer by reason of discovery. 40 This passage, with respect, tends to overlook that goodwill, or customer connection, is itself a proprietary interest, which an employer is entitled to protect. To this extent at least, it is inconsistent with Lindner v Murdock's Garage, and it does not represent the law in this State. The following words of Harman LJ in Home Counties Dairies Limited v Skilton [1970] 1 All ER 1227, [1970] 1 WLR 526, 530, a case which has repeatedly been accepted as authoritative, in which a restraint on a milk roundsman from serving customers whom he had himself served during the last six months of his employment was upheld and enforced, may be contrasted with those of Buford J:- The milkman is a familiar figure to all town dwellers. … [H]e has been throughout the years, one way or the other, a familiar and probably influential character well known to every householder in the road. It is natural in the circumstances that he acquires, usually on behalf of a master, a clientele along his round who, if he is an agreeable and competent man, will tend to rely on him for his arrival and to follow his departure to serve another employer. In these circumstances it is natural that employers should make great efforts to retain the goodwill so acquired and to restrain, so far as they can, the employee who leaves their service from taking his clients with him. This is very much a part of the employer's goodwill which he is entitled to protect, for it is his most saleable asset. 41 Similarly, in Marquett v Walsh (1929) 29 SR(NSW) 298, Long Innes J, on the application of a master baker, enforced a restraint against his former breadcarter soliciting custom of or serving bread to any of the persons within the area or on the runs on which he worked during his employment. His Honour pointed out (at 305) that the plaintiff's trade connection was a right of property. 42 The other case cited by Heydon was another American case, Ridley v Krout 180 P 2d 124 (Wyo, 1947), in which Blume J, speaking for the Supreme Court of Wyoming, in the context of proceedings for an injunction by the proprietor of a repair-shop against a former employed mechanic, said that while taking the customers of a former employer was taking goodwill, and was frequently restrained, the mere fact that an employee made acquaintances and friends in the course of his employment was insufficient to support a restraint (at 131):- If the plaintiff herein were entitled to an injunction herein, confined perhaps in scope and limited in time and space, it would be solely on account of the fact that the defendant gained an influence with the customers of the plaintiff during his employment, so that it would be unfair to the plaintiff that the defendant should at once enter into competition with him. Restrictive covenants against competition have frequently been upheld whereby salesmen, agents, canvassers and other employees who come into personal contact with their employer's customers agree not to engage in a competitive business within a limited time or area after leaving the service of their employer. … To pirate the customers of a former employer is like pirating his goodwill. … Still it depends on the circumstances of the case as to whether or not an injunction should issue. Everyone who lives any length of time in any community, as an employee, is bound to make acquaintances and friends and if this mere fact would authorise an injunction such as prayed herein we fear … there would be left but "a shadow of the general rule against the validity of restrictive covenants upon individual liberty of action as to one's trade or calling, and would establish in its stead what has hitherto been treated as an exception". 43 The position so far as concerns personal connections may I think be summarised as follows. First, the mere fact that the employee has friends or relations amongst, or makes friends with, customers of his employer, is not a sufficient connection to support a restraint. Secondly, however, if the employee in the course of employment gains special knowledge of or influence over the employer's customers, such as would give the employee an unfair advantage in competition, that will support a restraint, even if the customers include persons who are or have become the employee's friends or acquaintances. 44 A more robust view is taken where the employee's role includes obtaining and extending custom for the employer's business. When an employee's duty includes to build up the employer's clientele as well as to deal with existing clients, a wide restraint is more likely to be upheld, because in such circumstances the employer is entitled to protection against the employee taking advantage of the period of service to prepare for later competition [G W Plowman & Sons Limited v Ash [1964] 1 WLR 568; [1964] 2 All ER 10; Normalec Limited v Britton [1983] 9 FSR 318, 324; Dean, The Law of Trade Secrets, 2nd edn, [11.150]. In such a case, the establishment of a customer connection is not merely incidental to the employment, but its purpose. In that context, a covenant is considered reasonable, first, to remove the temptation that by cultivation of the target market during employment, the employee may prepare the ground for its exploitation by himself after the employment ends, rather than for his employer during the employment; and, secondly, to prevent exploitation after termination of the employment by the employee of a connection with the customer which the employer has paid the employee to establish for the employer's benefit. In this context in particular, the fact that in pursuance of his or her obligations under the employment contract an employee has for reward introduced customers who include relatives, friends and acquaintances does not [absent specific agreement to the contrary: see Sharah v Healey [1982] 2 NSWLR 223] remove or cut away the basis which would otherwise exist for a restraint. 45 Against that background, it remains to consider whether Koops Martin had a protectable interest in customer connection in the present case. 46 First, Koops Martin had invested in gaining its clientele. Many of Koops Martin's clients had come to Koops Martin as a result of the purchase of other businesses – in particular, the former Trevor Blay practice – for which Koops Martin had paid valuable consideration. Some had been introduced, while Mr Reeves was an employee, through referrals from Mr Eichmann, in respect of which referrals Koops Martin paid Mr Eichmann a referral fee. Part of Mr Reeves' function as an employee was to "grow" Koops Martin's business. As has been noted, he spent 40% of his time on it. In the year ending June 2005, he earned a bonus of $20,000 for his efforts in developing the business. 47 Secondly, Koops Martin had a significant financial interest in retaining existing clients. In the financial planning industry, a manager of funds receives, as well as an "up front commission" when funds are placed with an institution, "trail commission" which is paid periodically while the funds remain under management. So long as a client's funds remain under management of an advisor at Koops Martin, Koops Martin continues to receive the trail commission. If the client switches to an advisor with another firm, then Koops Martin ceases to receive the trail commission, and the new firm receives it instead. 48 Thirdly, Mr Reeves' personal contacts formed a very small component of the clientele that he serviced, and to the extent he introduced them, he was paid to do so. While some of the clientele for which Mr Reeves was responsible at Koops Martin were persons who were his relatives or friends, the evidence does not suggest that they formed a large segment. Although the evidence as to the extent to which this was so is vague and limited – consisting mainly in concessions made by Mr Malouf in cross-examination – I am prepared to infer that the customers who had the surname "Reeves" were relatives; I am prepared to accept that Mr Eichmann was a contact of Mr Reeves; and I am prepared to accept that there were others; but the evidence does not begin to establish that more than 5% of the clientele for which Mr Reeves was responsible were friends or acquaintances. Even of those who were, at least some, including the Reeves family and the Bellamys, were existing customers of Koops Martin before Mr Reeves' employment. To the extent that he introduced new customers including friends and relatives, the bonus that he received reflected, at least in part, his efforts. 49 Fourthly, Mr Reeves' role required him to establish a confidential relationship with clients, which gave him influence over them in the professional setting. After he completed his qualifications and became an authorised representative in January 2004, Mr Reeves provided financial advisory serve to Koops Martin's clients on his own. That involved advice on matters pertaining to the clients' financial affairs. It required him to understand their financial affairs and goals. It required him to manage investments on behalf of clients, and to give effect to their instructions. He undertook interviews with clients for the purpose of obtaining data about their financial position, their tolerance of risk, and their aspirations. Such information was obtained in face-to-face interviews and in telephone conversations. He developed a relationship with clients in respect of their financial affairs. The information that he obtained from them was personal and private confidential information. In cross-examination, he accepted that clients came to trust him to structure their affairs in the most effective way, and that he was an important person to such clients, and he agreed that, over time, a relationship of trust developed between the client and him, and that such a relationship was fundamental to performance of the job of a financial advisor. He agreed that while employed at Koops Martin he tried to build a strong relationship of trust with Koops Martin's clients. 50 I am satisfied that through Mr Reeves' employment, he acquired knowledge of the needs and requirements of the Koops Martin clients who were serviced by him, and more importantly, influence over them. Mr Reeves' role involved him in confidential dealings with Koops Martin's clients. For the clients who were "domiciled" with him, he was in every sense the face of the business. It was he who took their instructions, developed their plans and gave them advice. Indeed, it was his advice that the clients were seeking. It was inherent in his duties that he would gain the trust and confidence of clients. Through his employment he became "their" financial planner. From their perspective, it was his advice – not the firm's – that they were seeking. He was in every sense the face of the business to them. But as between him and his employer, that customer connection belonged to the employer, and it was an interest that the employer was entitled to protect by a reasonable restraint. 51 Moreover, it was part of the job for which he was paid to develop the business by introducing customers, and the employer was entitled to protect itself against the possibility that having been employed to cultivate customer connection for it, he might later exploit it for himself. 52 The extent to which, even unsolicited, clients of Koops Martin have, since Mr Reeves' departure, sought him out at MBT, is eloquent testimony of the strength of connection, and the influence with customers, which he built up during his employment. He plainly gained special knowledge of the customers and their needs and requirements so far as financial planning advice is concerned. And his confidential relationship with them was plainly one that gave him influence with them. That he may also have had a personal relationship, quite apart from the professional one, with some of them, does not detract from the circumstance that in the course of his employment he established a relationship which gave him influence over them in the professional setting. The Validity Issue - Was the Restraint No More Than Reasonable 53 The validity of a restraint is judged at the time at which the contract is made, and having regard to what it entitled or requires the parties to do as distinct from what they intend to do or have actually done [Nordenfelt, 574; Commercial Plastic Limited v Vincent [1964] 3 WLR 820, 829; Heydon, pp 37-40; Galbally, [117]; Lindner v Murdochs Garage; Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337, 344; Woolworths Limited v Olsen, 372 [40]]. As the parties have to turn their minds as to what is reasonable at the time when the restraint is created, some allowance must be made for potential developments in the role of the employee and the nature of the business for which he or she might be responsible in the future. Reasonableness does not require precise concordance between the restraint and what might ultimately be seen as the employer's legitimate interest; it is accepted that a reasonable covenant might on the one hand not totally protect the employer in one respect, and on the other go somewhat further than is necessary for legitimate protection, without ceasing to be reasonable [Coote v Sproule, 580-581]. 54 In this case, after referring to some general considerations, five aspects of the restraint require consideration: · Its scope, insofar as it prohibits dealing with customers other than those with whom Mr Reeves directly dealt; · Its scope, insofar as it prohibits dealing with customers of other divisions of the Group than the financial planning practice of the plaintiff; · Its scope, insofar as it prohibits not only soliciting and enticing but also accepting instructions; · Its area; and · Its duration. 55 The extent of business which a restraint leaves open to the employee is a relevant consideration as to whether the protection afforded by the restraint is excessive [Fitch v Dewes [1921] 2 AC 158; Connors Brothers Limited v Connors [1940] 4 All ER 179]. In this case, the employee is left with a large range of endeavour open to him. First, from the date of termination, he is at liberty to do as he pleased (including even soliciting customers) outside of the city of Coffs Harbour. He is also at liberty, within the city of Coffs Harbour, to be engaged as a principal or employee in a competing business, and to solicit new business and act for new clients, and the existing customers of any of the other 40-odd financial planners in Coffs Harbour. All that is excluded from him are those who were customers of the Group in the last twelve months. And after twelve months, there is no restraint at all. 56 Another general consideration is industry standards and practice. No expert evidence was adduced as to these matters, but there were in evidence some employment contracts of financial planners in Coffs Harbour. Mr Malouf's employment agreement with Koops Martin dated 12 March 2002 is not directly comparable, because of his managerial and directorial status, but it provided for his employment "as an accountant and financial planner advisor", was terminable on four weeks' notice, and included a restraint that, for a period of eighteen months after termination, he would not solicit, canvass or in any way whatsoever seek the custom of, or act for directly or indirectly, any of the clients for whom Koops Martin or its predecessors had acted, whether on behalf of himself or for any other party as an employer or otherwise. 57 Mr Corkill's contract dated 15 June 2004 provided for his employment as a financial planner, terminable on one months' notice. Although it contained a restraint on soliciting or enticing employees and staff, and on accepting employment which would require the revelation of confidential information of the group, it did not contain any prohibition on soliciting or accepting instructions from customers. 58 Mr Reeves' new employment contract with MBT dated 11 November 2005 includes a restraint by which he agrees for a period of one year, in the city of Coffs Harbour, not to attempt personally or by letters, advertisements or otherwise, to obtain customers or clients of MBT for any person, firm or company carrying on the business of financial planning other than MBT, and not at any time during or after the determination of his employment for any reason and either on his own account or for any other person or firm or company to solicit, interfere with or endeavour to entice away from MBT any person, firm or company, who at any time during the continuance of his employment shall have been a customer or client of MBT. This contract was negotiated at a time when Mr Reeves was alert to the issue of a restraint and the difficulties which it might occasion, and he requested the amendment of the draft in another respect – relating to his probationary period – which was conceded by MBT. It is some evidence that Mr Reeves accepts that financial planners in Coffs Harbour might reasonably expect from employees a restraint on solicitation of customers for a period of twelve months. 59 A third general consideration is the circumstances in which the restraint was created, and in particular whether the parties were in an approximately equal bargaining position and whether advice was available to or taken by the employee [Tank Lining Corporation v Dunlop Industrial Pty Ltd, 666; GFI Group Inc v Eagleston [1994] FSR 535, 542; Dean, [11.170]]. These circumstances go mainly to the weight that might be given to the fact of apparent agreement, in supporting a restraint as reasonable because of the parties' agreement. I do not think that the absence of independent legal advice renders unreasonable a restraint which would otherwise be reasonable, at least in the absence of an application under the Contracts Review Act 1980 (NSW) or Industrial Relations Act 1996 (NSW), s 106. Many employment contracts are entered into without legal advice. I do not think that its absence in this case is of significance. Reasonableness - clients not serviced by Mr Reeves 60 The restraint, in none of its three limbs, is limited to those customers of Koops Martin with whom Mr Reeves had personal contact, but extends to all those who were customers of Koops Martin (or, in the case of the first and third limbs, the Group) in the twelve month period, regardless of whether or not they had any contact with Mr Reeves. Mr Russell submits that that is more than is reasonably necessary for the legitimate protection of the interests of Koops Martin. 61 In Coote v Sproule, Harvey CJ in Eq said (at 580) that this type of covenant should logically be confined to a restraint on soliciting or serving any customer the employee had served on the employer's behalf who but for such solicitation or service would have continued or renewed his trade with the employer. 62 In Harlow Property Consultants Pty Limited v Byford [2005] NSWSC 658, White J observed that covenants against solicitation by an employee of any customers of the employer, regardless of whether they were customers with whom the employee dealt, had from time to time been upheld, but that in principle, a covenant against soliciting an employer's customers in general, as distinct from only those with whom the employee has dealt, is wider than reasonably necessary to protect the employer's customer connection and will be invalid unless it can be upheld on the ground that it is reasonably necessary to protect the employer's trade secrets or confidential information; otherwise, his Honour said, the employer is not endeavouring to protect what he has, but to gain a special advantage which he could not otherwise secure by protecting himself from competition from his former employee [Harlow Property Consultants Pty Limited v Byford [30]; see also Konski v Peet [1915] 1 Ch 530, 539; Smith v Ryngiel [1988] 1 QdR 179, 186]. 63 Heydon (at 127) points out that there are exceptions (1) where the employee knows all the customers; (2) in the case of an employee who may well in one way or another through the employment gain a special influence over or knowledge of the requirements of any of the employer's customers, whether he dealt with them or not; and (3) in respect of persons called on by a traveller in the hope of developing the initial contact later. 64 Thus in Stenhouse Australia Limited v Phillips [1974] AC 391, a restraint which prohibited solicitation of all clients of the employer was upheld, but on the basis that the employee as managing director was in a position to gain knowledge of and influence over every customer. Similarly, in Gilford Motor Company v Horne [1933] 1 Ch 935, a restraint prohibiting solicitation of all clients of the firm was upheld, where the employee had been the managing director and had the fullest opportunity of getting to know every customer of the company other than casuals. Restraints on acting for all clients of the firm were upheld in Sharah v Healey, and in Bridge v Dawes [1984] 1 AC 705, but they were partnership cases in which the mutuality of restraints between the partners was an important consideration. 65 In Plowman, in which a covenant not to solicit persons who had been customers of the plaintiff during the employment (whether or not serviced by the defendant) was enforced, on the basis that the plaintiff had an interest in maintaining its connection with discontinued as well as existing customers, and that the employee having been engaged as a sales representative dealing with farmers and market gardeners in a small agricultural community, he would likely be known as an employee of the plaintiff and might well gain a special influence over or knowledge of the requirements of any of the employer's customers, whether he dealt with them or not. Plowman was applied in Business Seating Renovations Ltd v Broad [1989] ICR 729, 733, but distinguished in Austin Knight (at 58), on the basis that in Austin Knight there was no ground for inferring that Miss Hinds was known to the two-thirds of the branch customers with whom she did not deal, far less that she acquired influence over or had knowledge of their special requirements. 66 Cases such as Stenhouse and Plowman show that a restraint may be reasonable even though it extends beyond customers with whom the employee has personal contact. This is so where, despite the absence of personal contact, influence may be established by, for example, seniority of the employee's position (as in Stenhouse); or where the employee's obligation involves developing the business within a target market (as in Plowman). If the employee has gained special knowledge and/or influence of customers or even of potential customers in the course of employment, a covenant may be reasonable notwithstanding that it extends to clients with whom the employee did not have personal contact. Once again, it must be borne in mind that this judgment has to be made when the restraint is taken, and not at the end of the employment, when the position may have evolved. And once again it is to be borne in mind that precise concurrence of the restraint and the legitimate scope of protection is not necessary. 67 I would infer that it was always envisaged that Mr Reeves would service personally some of Koops Martin's clients, who would be allocated to him for that purpose. With those clients, it was foreseeable that he would develop a close relationship involving special knowledge and influence. When a financial planner left, the firm circulated customers informing them of the replacement; in the case of at least one departure, the circular included a reference to Mr Reeves. 68 Koops Martin promoted a "team" approach to the delivery of financial planning services, and from time to time Mr Reeves received some assistance in respect of some of his clients from other financial planners, for example Mr Corkill, and vice versa. Mr Reeves agreed that they always worked as a team, but the extent of this seems to be that assistance would be provided in the background, and at a relatively low level; it did not involve the "assistant" having any contact with the client of the financial planner who was responsible for that client. 69 As has been mentioned, from early 2004 onwards, Mr Reeves was involved in presentations to clients, including clients primarily allocated to other financial planners, on behalf of Koops Martin. 70 This issue is finely balanced. It might be said in favour of validity that when the covenant was taken it was not unreasonable to think that Mr Reeves would acquire some knowledge of and influence over clientele more extensive than those who were serviced by him, and thus to take a covenant restraining solicitation and enticement of or dealing with clientele not limited to those for whom he was responsible. But he was not an overall manager of the business. His confidential relationships would be developed only with those clients who were serviced by him. The contact which he would have with clients other than those he serviced would be incidental, as part of the Koops Martin team, in a context where those other clients had a primary attachment to another financial planner in the team. For those clients, he was not the persona of the firm. Insofar as the restraint would have prohibited solicitation of customers of Koops Martin other than those he services, it was in the circumstances of this case excessive. 71 Ultimately, Mr Fernon did not press for an injunction in respect of customers other than those who Mr Reeves personally serviced. Reasonableness - customers of other divisions of the Group 72 The first and third limb of the restraint – unlike the second limb, which is limited to customers of Koops Martin – refers to customers of the Group. In the context of the third limb, which is concerned with the preservation of confidentiality, this may be unobjectionable. But as to the first limb, the restraint prohibits solicitation not only of persons who were customers of the plaintiff financial services company, but also of persons who were customers of the rest of the Group – including its accountancy, mortgage broking and legal practices. 73 Even in the case of a single employer, a covenant which prevents the solicitation of customers of a different part of the employer's business from that in which the employee was engaged has often been held excessive [see, for example, Morris & Co v Ryle (1910) 103 LT 545; Attwood v Lamont; Morse v Fowler (1899) 44 Sol Jo 89; Heydon, 112-115]. The validity of a covenant which prohibits an employee from soliciting customers of the employer's related companies has been considered in a number of cases. 74 In Henry Leetham & Son v Johnston-White [1907] 1 Ch 322, Mr Leetham contracted as agent of a principal company and five subsidiaries with the defendant for him to serve the holding company or one of the subsidiaries. The defendant became the employee of one of the subsidiaries in its business. The restraint protected an area much wider than the business of the subsidiary, but reasonable if regard could be had to the combined business of the group. All six companies sued to enforce it; the Court of Appeal held that it was excessive and void, and that regard could be had only to the business of the subsidiary in which the defendant was employed. Farwell LJ said (at 327):- In the same way it follows, to my mind, that a man whose business is a corn miller's business, and who requires to protect that, cannot, if he has also a furniture business, require the covenantee who enters into his service as an employee in the corn business to enter into covenants restricting him from entering into competition with him in the furniture business also, because it is not required for the protection of the business in which the man is employed, however much it may be beneficial to the individual person the owner both of the corn business and the furniture business. 75 Henry Leetham was applied in this court by Hope J in McGuigan Investments Pty Limited v Dalwood Vineyards Pty Limited [1970] 1 NSWR 686, where his Honour after citing extensively from Henry Leetham said (at 695-6) that its application to the case before him would result in the defendant not being entitled to support the covenant by reference to the business or interests of its fellow subsidiary, and that despite submissions that he should not apply it, the proper course was to do so and hold that the defendant was not entitled to justify the covenants otherwise than by reference to its own interests treating it as a separate entity. 76 Henry Leetham was distinguished by the Privy Council in Stenhouse, 404, where Mr Phillips had been the managing director of the plaintiff, which was the holding company of the group, the subsidiary companies being merely agencies or instrumentalities through which the holding company directed its integrated business and in the protection of the businesses of which it had a real interest. Those facts distinguished the case from Henry Leetham, in which the company with which the employee was employed had a limited business, whereas the restraint was expressed in far wider terms. That distinction is not available in the present case, where there is no suggestion that the financial services company controlled or coordinated the Group. 77 In Business Seating Renovations Ltd v Broad, the plaintiff was in the business of renovating office furniture, and it had an associated company in the business of manufacturing and selling new office furniture. The defendant was employed by the plaintiff in the renovation business, and covenanted not for one year to solicit from the plaintiff or any associated company the business of any customers during the year preceding termination. Millett J held the covenant valid in respect of customers of the plaintiff, but void in so far as it extended to customers of the associated company, who were merely potential customers of the plaintiff. 78 Generally, therefore, a restraint against the solicitation of customers of a company other than the employer is void, even though the companies are related, although there is an exception where the holding company effectively carries on business through the subsidiaries. Ultimately this is an emanation of the underlying principle which depends on special knowledge or influence over customers acquired in the course of employment: ordinarily, the employee of one subsidiary will not acquire such knowledge or influence in respect of clients of others, though a senior employee of the holding company might. 79 In the present case, although there is some evidence that clients were referred to the financial services practice from the accountancy and mortgage broking practices, there is no basis for supposing that Mr Reeves acquired any special knowledge of or influence over customers of those practices. He had no relevant connection with such clients of the Group, and a restraint that prevents him from soliciting or acting for them goes beyond what is necessary for the legitimate protection of Koops Martin's interests. To that extent, the restraint is unreasonable. Reasonableness - acceptance of instructions 80 As has been observed, the second limb of the restraint prohibits not only solicitation and enticement of customers, but merely accepting instructions to act for them. Mr Russell submits that this is mere prohibition of competition. 81 Yet again, it is worth noting from Coote v Sproule that there does not need to be a precise concordance of the restraint and the legitimate interests of the employer. 82 It is well established that "territory" covenants may be upheld to preserve customer connection, though they will be closely scrutinised, even though they will have the effect of preventing acceptance of instructions [Lindner v Murdochs Garage, 650 (Fullagher J); Harlow v Byford, [40] (White J)]. Such a covenant is far more anti-competitive than one limited to prohibiting acting for former clients of the employer. A covenant against accepting business (as distinct from one merely against soliciting it) was upheld in Home Counties Dairies Limited v Skilton, and in Scorer v Seymour-Jones [1966] 1 WLR 1419, 1427. Covenants against acting for clients of the employee's former practice have been upheld in Sharah v Healey, Bridge v Dawes and Smith v Ryngiel. 83 One reason for accepting that a restraint on acting or accepting instructions is permissible is that it removes the difficulty of proof of actual solicitation, and the temptation to lay the groundwork for post-termination competition by surreptitious solicitation before termination. Similar reasoning has been held to support an employment restraint in aid of the protection of confidential information [Woolworths Limited v Olsen, [67]; Littlewoods Organisation Ltd v Harris [1977] 1 AllER 1472, 1479, 1485; Wright v Gasweld Pty Limited, 333; Kone Elevators Pty Limited v McNay (1997) ATPR ¶41-564, 44, 834]. 84 But the more powerful reason is that, the stronger the customer connection which the employee develops, the less will solicitation be required; the strongest connections are those in which the client will follow unsolicited because of his or her connection with the employee, notwithstanding that that connection belongs to the employer. An anti-solicitation covenant is insufficient to protect an employer's customer connection in that context. 85 As already mentioned, there is strong evidence of such a connection in this case, and a "no dealing" restraint is no more than reasonable protection of the employer's interest in its customer connection. Reasonableness - area 86 The territorial operation of the restraint is limited to the city of Coffs Harbour. Generally, the area within which a restraint operates is not relevant when it is one against solicitation of or dealing with customers (as distinct from one against engaging in business). Where a restraint prohibits solicitation of specific customers or classes of customers, no area limitation is generally required [Plowman; Smith v Ryngiel. Limitation in this case to the city of Coffs Harbour is not at all excessive. Reasonableness - duration 87 In this case the restraint is expressed to operate for twelve months from the termination of employment. 88 Generally, the test of reasonableness for the duration of such a restraint is what is a reasonable time during which the employer is entitled to be protected against solicitation; that in turn depends on how long it would take a reasonably competent replacement employee to show his or her effectiveness and establish a rapport with customers [Stenhouse; Daly Smith Corporation (Australia) Pty Limited v Cray Personnel Pty Limited (NSWSC, Young J, 14 April 1997, unreported)]. A related albeit subsidiary consideration is how long might the hold of the former employee over the clientele be expected to last before weakening. 89 In the present case, some of the clientele are insurance clients. Insurance business is of an annual cyclical nature, and an advisor in that setting may well have contact with clients no more than annually. With investment clients also, annual contact is a typical pattern; Mr Reeves spoke to at least his major clients annually. Documentary evidence shows that reviews of clients' investments were planned for a year ahead. Annual contact with a client is a reasonable minimum standard, and supports the view that a twelve month restraint – which would allow a replacement employee to contact all clients and demonstrate his or her effectiveness and begin to establish a rapport – a reasonable opportunity to do so. It would also accord with the duration of the restraint that Mr Reeves has accepted with his new employer, MBT. 90 In my opinion, twelve months is no more than reasonable to allow Mr Reeves' replacement an opportunity to establish a rapport with and demonstrate his or her competence to clients, and thus a reasonable time for the operation of the restraint. The validity issue - conclusion 91 Koops Martin has a legitimate interest founded in customer connection, which it was entitled to protect by requiring a reasonable post-employment restraint from Mr Reeves. The restraint taken went beyond what was reasonably necessary for the protection of that interest insofar as it prohibited soliciting or dealing with customers of Koops Martin who were not serviced by Mr Reeves, and insofar as it prohibited soliciting or dealing with customers of other divisions of the Group. But insofar as it prohibited acceptance of instructions from, as well as soliciting, customers of the financial services company who were serviced by Mr Reeves, it was reasonable, and it was not excessive in area or duration. To that extent, it is valid pursuant to Restraints of Trade Act, s 4(1). The s 4(3) issue 92 Restraints of Trade Act, s 4(3), provides as follows: 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 restraint is not against public policy) as the Court thinks fit and any such order shall, notwithstanding sub-section (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. 93 Mr Russell submits that the court should order that the restraint be altogether invalid from the date on which the order is made. He submits that there has been a manifest failure to make the restraint reasonable, having regard to the circumstance that the principal of Koops Martin is a lawyer; that Mr Reeves was relatively inexperienced, young and entering his first job as a financial planner; and that Koops Martin did not raise or discuss the restraint clause with him, nor take any steps to make it reasonable, but instead has sought to enforce it to its full and literal effect. 94 Although s 4(3) has been discussed in a number of cases [Kone Elevators Pty Limited v McNay, ¶43, 828; Twenty-First Australia Inc v Shade; KA & C Smith Pty Limited v Ward (1998) 45 NSWLR 702, 727-8], counsel was not aware of any case in which it had been successfully invoked. Its purpose is apparently to encourage employers who create restraints to make a genuine endeavour at achieving reasonableness, by exposing them to the risk of invalidity, despite s 4(1), if they manifestly fail to do so. In this context, "manifest" means "plain" or "obvious". Another purpose of s 4(3) is to enable an application to be made by a person bound by a restraint prospectively to determine the extent of its validity before embarking on a course that might otherwise attract an application by the employer for an injunction. 95 Any application under s 4(3) involves two issues: first, whether there has been a manifest failure to attempt to make the restraint a reasonable one; and secondly, if so, whether (as a matter of discretion), any and if so what order as to invalidity should be made [Twenty-First Australia Inc v Shade]. 96 The analysis above of the restraint in this case has concluded that it is excessive in two respects: in extending to customers of Koops Martin who were not serviced by Mr Reeves, and in extending to customers of other divisions of the Group. In the first respect, although I have concluded that the covenant is excessive, the contrary view was far from unarguable. In the latter respect, the position was less equivocal, but looked at as a whole, I do not think that the evidence establishes a plain or obvious failure to attempt to make the restraint a reasonable one. Moreover, there is no suggestion that Mr Reeves has accepted instructions from customers of other divisions of the Group, so that this aspect of the restraint appears of little practical significance. On this, the scope of activity left open to the employee, and the express statement that the restraint is not intended to prevent him from working for a similar business in Coffs Harbour, tells in favour of a conclusion that there was a genuine attempt to be reasonable. 97 Even if this were wrong, and there were a "manifest failure" to attempt to make the restraint a reasonable one, I would not as a matter of discretion reduce the valid operation of the restraint below that which is preserved by s 4(1). The evidence does not disclose anything about the conduct of the employer or the circumstances in which the restraint was made to suggest a high-handed or capricious approach. 98 I am therefore not disposed to grant any relief under s 4(3). Conclusion 99 My conclusions, which I announced at the conclusion of the hearing on 6 April 2006, may be summarised as follows: 1. Mr Reeves has not approached, solicited, enticed or endeavoured to entice away from Koops Martin any of its clients, contrary to the first limb of the restraint. Nor has he accepted employment that would require him to reveal confidential information of the Group, contrary to the third limb of the restraint. However, he has, having been approached by clients of Koops Martin, accepted their instructions and performed financial planning and advisory work for at least some of them, and unless restrained he will continue to do so. 2. Properly construed, the restraint prohibits Mr Reeves from soliciting or accepting instructions from persons who were clients of Koops Martin in the twelve month period prior to 8 December 2005, whether or not doing so would involve any breach of the confidentiality of the business operations of Koops Martin. 3. Through Mr Reeves' employment with Koops Martin he acquired knowledge of the needs and requirements of its clients and influence over them. He has become seen, by that part of the clientele for which he has responsibility, as their financial planner; from the clientele's perspective it is his advice rather than the firm's advice that is sought, and in every sense, to that part of the clientele which has been "domiciled" with him, he has been the face of Koops Martin's business. Moreover, it has been his job, in part, to develop that customer connection. As between him and his employer, that customer connection belongs to the employer and not to him, and the employer was entitled to protect its interest against the possibility of exploitation by Mr Reeves, by a reasonable restraint. 4. The restraint is not excessive as to area. For reasons which include the annual cyclical nature of the insurance business, the fact that typically clients in the financial planning business are seen about annually, and that Mr Malouf's restraint exceeds twelve months and Mr Reeves' new restraint with MBT is for twelve months, its duration for twelve months is not unreasonable. 5. The restraint is not unreasonable in prohibiting Mr Reeves from accepting instructions from, as well from soliciting or enticing, clients of the financial services company. This is particularly so because the strongest customer connections will produce cases which do not require solicitation for the customer to follow the employee – the strength of the connection being such that, as has happened here, the customer may follow unsolicited. 6. The restraint is excessive in prohibiting soliciting, or accepting instructions from, customers of the financial services company other than those who were serviced by Mr Reeves. It is also excessive insofar as it would prohibit solicitation of persons who were customers of other divisions of the Group than the financial services company. 7. There has been no manifest failure to attempt to create a restraint that was a reasonable one. The first respect in which it was found to be excessive was one that was at least arguable. The second is practically immaterial, because there is no suggestion that Mr Reeves has accepted instructions from customers of other divisions of the Koops Martin Group. Even if there were a manifest failure, as a matter of discretion I would decline relief in the absence of evidence that the employer has acted in a high-handed or capricious manner. 8. I will not make any order in respect of the third limb of the restraint, since no actual or apprehended breach of it has been established, and in any event, Mr Fernon disavowed any claim for an injunction that would prevent Mr Reeves from continuing in the employment of MBT. 100 For the foregoing reasons, on 6 April 2006 I pronounced the following orders: 1. Order that until 7 November 2006 the defendant be restrained from, within the city of Coffs Harbour on his own account or on behalf of or in association with others, directly or indirectly: (a) approaching or enticing or endeavouring to entice away from Koops Martin Financial Services Pty Limited any persons, firms or companies who were clients of Koops Martin Financial Services Pty Limited listed on Exhibit PX03; (b) accepting any instructions to perform any financial planning or advisory work for any such person. 2. Order that the cross-claim be dismissed. 3. Order that the defendant pay the plaintiff's costs. 101 I then indicated that I would extend time to appeal, so that such time would not commence to run until my reasons were published. I therefore further order: 4. Order that time within which a notice of appeal or an application for leave to appeal as appropriate may be filed be extended to the 28th day from this date. 5. Order that the exhibits be returned at the expiration of 28 days unless notice of appeal or an application for leave to appeal has been filed within that time. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.