New South Wales Supreme Court CITATION : Cosoff Cudmore Knox v David Peter Rydon [2007] NSWSC 198 HEARING DATE(S) : 02/03/07 JUDGMENT DATE : 2 March 2007 JURISDICTION : Equity Division JUDGMENT OF : White J EX TEMPORE JUDGMENT DATE : 2 March 2007 DECISION : See paragraphs 54 and 55 of judgment. CATCHWORDS : RESTRAINT OF TRADE – Solicitor – Clause in partnership agreement – Application for interlocutory injunction restraining former partner from providing legal advice to clients of partnership, or enticing any person employed by the partnership from continuing employment – Whether clause valid – Balance of convenience – Injunction in the terms sought would not serve the purposes of the clause – Limited injunction ordered. LEGISLATION CITED : Corporations Act 2001 (Cth) Lindner v Murdock's Garage (1950) 83 CLR 628 Bridge v Deacons [1984] AC 705 CASES CITED : Rouen & Ors v Ryan [2001] NSWCA 230 Oswald Hickson Collier & Co v Carter-Ruck [1984] AC 720 Edwards v Warboys [1984] AC 724 Sharah v Healey [1982] 2 NSWLR 223 Cosoff Cudmore Knox PARTIES : v David Peter Rydon FILE NUMBER(S) : SC 1562/07 COUNSEL : Plaintiff: D A Smallbone Defendant: N J Kidd SOLICITORS : Plaintiff: Tresscox Lawyers Defendant: Sachs Gerace Lawyers IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WHITE J Friday, 2 March 2007 1562/07 Cosoff Cudmore Knox v David Peter Rydon JUDGMENT 1 HIS HONOUR: This is an application by the partners of a firm of solicitors, Cosoff Cudmore Knox, for an interlocutory injunction to restrain the defendant, Mr Rydon, a former partner in that firm, from providing legal advice to any person who was a client of the firm within the twelve months immediately prior to Mr Rydon's ceasing to be a partner. An interlocutory injunction is also sought to restrain Mr Rydon from enticing, or attempting to entice, any person who was an employee of that firm in that period. 2 The defendant entered into a partnership agreement with the other partners of the firm in June 2005. The business of the partnership was that of a legal practice. It was common ground that Mr Rydon did not make a capital contribution to the firm on being admitted as a partner. Nor was he entitled to an interest in the assets of the partnership, including its goodwill. He was entitled to such share in the net profits of the partnership as might be agreed upon from time to time. He was not required to contribute to any losses, whether of capital or otherwise, and was entitled to an indemnity from persons described as "Capital Partners" in respect of any losses. 3 The partnership was determinable, inter alia, by Mr Rydon's giving not less than two months' notice in writing of termination to the managing partner. Clause 22 of the partnership agreement contained a covenant against competition. Clause 22.3 provided: "In consideration of the Capital Partners and the other partners in the Partnership entering into this Agreement, and in order to protect the goodwill of the Partnership, the New Partner will not (either directly or indirectly) commit or be interested in the commission of each Prescribed Act for each Prescribed Period, subject to the provisions of clause 22.8 ." 4 Clause 22.8 is not presently material. Clauses 22.1 and 22.2 provided: " 22.1 Prescribed Act For the purposes of clause 22.3 each of the following is a Prescribed Act: 22.1.1 providing any legal advice to any person who is a client of the Partnership (whether or not that client was attracted to the Partnership by the New Partner); 22.1.2 assisting any other person (either directly or indirectly) to provide any legal advice to any person who is a client of the Partnership (whether or not that client was attracted to the Partnership by the New Partner); and 22.1.3 enticing or attempting to entice any person who is employed by the Partnership or any entity associated with the Partnership from continuing to be so employed. 22.2 Prescribed Period For the purpose of clause 22.3 each of the following is a Prescribed Period commencing from the determination of this Agreement: 22.2.1 one year 22.2.2 nine months; and 22.2.3 six months. " 5 Mr Rydon has proffered an undertaking without admissions, and on the basis of the usual undertaking as to damages, that for a period until 31 March 2007, or further order, he will not provide legal advice or assist any other person to provide legal advice to any of certain listed clients, other than four named clients in connection with current matters, and Robinson Legal in connection with current or new matters. The list of clients in respect of whom such an undertaking is proffered, comprises Mr Rydon's clients during the period he was a partner of the firm. 6 The first issue is whether he should be restrained until the final hearing of the proceedings from providing legal advice or assisting others to provide legal advice to clients of the firm, other than those for whom he acted whilst a partner. 7 The plaintiffs are content to exclude from the injunctive relief they seek, any prevention of the defendant from continuing to act as a solicitor, or from assisting others to act as a solicitor for the firm Robinson Legal as a client. Robinson Legal had been, it seems, a client of the plaintiff firm. Nor is there a dispute that the defendant should be permitted to continue to act as solicitor, or to assist others to act as a solicitor, in connection with current matters involving three clients, namely, Bentleys, Freckleton and Hyderidge. 8 However, there is a dispute, and it was the principal matter argued on the application, as to whether the defendant should be restrained from providing legal advice to a company called Via San Antonio Pty Limited ("VSA"). There is also a dispute as to whether any injunction should go against enticing employees of the plaintiff's firm, as there is no evidence that the defendant has attempted or intends to attempt to entice any such person of the plaintiff's firm. 9 Mr Rydon gave notice of determination of the partnership agreement on 30 October 2006. By agreement, the period of notice was shortened to one month. As I understand it, it is common ground that Mr Rydon ceased to be a partner on 30 November 2006. 10 Mr Rydon specialised in litigation and dispute resolution. Whilst he was a partner of the plaintiff, one of his clients was VSA. VSA had been introduced to the firm by a Mr Lombardo, who was himself a partner of the firm between 21 June and 3 November 2006. Mr Lombardo left the plaintiff's firm and joined Robinson Legal on or about 3 November 2006. Mr Rydon also left the plaintiff firm in order to commence practice with Robinson Legal. 11 On 3 November 2006, there was a hand-over of files from Mr Rydon to Mr Rigby in the plaintiff's firm. On 15 November 2006, a meeting was held between two officers of VSA, including a Mr Mastronardo, who is a director of that company, with partners of the plaintiff. The purpose of the meeting was for the plaintiff to seek to persuade VSA to keep its work with the plaintiff. At the meeting, Mr Mastronardo expressed his confidence in Mr Rydon's continuing to act as his solicitor, although he listened to the proposal which was put to him for the work to stay with the plaintiff. 12 At that time, extensive work had been done by the firm in preparing litigation which VSA proposed to bring against Walker Corporation. That work had been done from about June 2006. Proceedings had not been commenced on 16 November 2006, nor had they been commenced prior to 1 December 2006. However, they were commenced shortly thereafter, it seems, on or about 4 December 2006. 13 On 16 November 2006, Mr Hurren of the plaintiff sent an email concerning his wish that VSA keep their work with the firm, and advising that, apart from Mr Rydon, the existing team would remain intact. He asked for payment of a sum of a little over $100,000 to clear existing costs. 14 However, Mr Mastronardo was determined not to retain the services of the plaintiff firm. Nonetheless, he did not terminate the retainer of the plaintiff's firm immediately. The reason for this, Mr Mastronardo said, was to keep a dialogue open to sort out the billings. 15 On 16 November 2006, a Mr Mirels of VSA, acting on Mr Mastronardo's instructions, sent an email to Mr Hurren asking that no further work be done without prior consultation with VSA, and holding out the possibility of the plaintiff continuing to work for VSA. On 22 November 2006, Mr Mirels advised Mr Hurren that a decision on progressing the case had been deferred to mid-January 2007, and that VSA looked forward to meeting up with Mr Hurren again in the new year. 16 On 28 November 2006, VSA gave instructions to Robinson Legal for them to proceed with a claim against Walker Corporation. Mr Rydon commenced work with Robinson Legal on 4 December 2006. The evidence on this application is that Mr Hurren was then unaware that Mr Rydon was working for VSA. In fact, Mr Rydon commenced work immediately on VSA's matter and did a substantial amount of work on it from that date. 17 Mr Hurren's evidence is that he assumed that Mr Rydon was honouring the restraint clause in the partnership agreement. He based that assumption on the fact that Mr Rydon had conducted a hand-over of matters, including the VSA matter, in early November 2006. Mr Rydon had written to him on 22 November 2006 saying that he had "striven to approach the departure process professionally, I have not contacted clients ... I have basically kept my mouth shut", and Mr Rydon had contacted Mr Hurren to discuss three matters in which Mr Rydon wished to continue to act, and sought Mr Hurren's approval to that course. The VSA matter was not one of those three. 18 On 23 January 2007, Mr Hurren received an email from Blake Dawson Waldron in relation to litigation between VSA and Walker Corporation. It appears they acted for a party required to produce documents under subpoena, and they referred to the litigation. The email was addressed to Mr Rydon. Mr Hurren says that this email was the first notice to the plaintiff that the defendant was acting for VSA. There is no contrary evidence on this application. 19 Within two days of receiving this email, a letter was sent from the plaintiff to Mr Rydon complaining that there had been a substantial breach of clause 22 of the partnership agreement by his advising VSA. The letter concluded by saying that, if the managing partner did not hear from Mr Rydon in the very near future, "you should assume that the [plaintiff firm would] proceed to take such action as it might consider necessary to enforce its rights". 20 There then followed a series of letters which the plaintiff firm sought to exact admissions or undertakings, or both. These concluded with a letter of 15 February 2007 in which, amongst other things, Mr Rydon's solicitors denied that the plaintiff was entitled to enforce clause 22 of the partnership agreement. These proceedings were commenced on 20 February 2007. 21 I mention these matters as one of the grounds upon which injunctive relief is resisted is that it is alleged that the plaintiff has been guilty of acquiescence or laches, or that, otherwise, the delay in seeking to enforce its rights was such that, as a matter of discretion, injunctive relief should be refused. In connection with that, there is evidence that, from 4 December 2006, Mr Rydon has done a substantial amount of work for VSA in connection with the litigation which has been commenced against Walker Corporation. 22 There is presently on foot a tight timetable in those proceedings. It requires, for example, that the parties exchange lists of documents by today, that VSA file and serve its evidence by 9 March, that the defendants to those proceedings file and serve their evidence by 30 March, and VSA file and serve any final replies by 13 April 2007. The gist of Mr Rydon's evidence is that he is the only solicitor with the knowledge of the matter and the capacity to conduct it for VSA with the firm Robinson Legal, and that it would take considerable time, and presumably cost, for any other solicitor to become sufficiently acquainted with the matter to be in a position properly to conduct the proceedings for VSA, particularly in light of the tight timetable. 23 The plaintiff was not paid the amount of costs for which they sought payment, nor indeed, as I understand it, any amount for their costs. On 22 December 2006, Mr Hurren gave VSA a deadline to pay outstanding amounts by 22 January 2007. Following non-payment of those amounts, the plaintiff served a creditor's statutory demand on VSA pursuant to s 459E of the Corporations Act 2001 (Cth). That demand has since been withdrawn. 24 Mr Mastronardo says that he believes that VSA has been overcharged, and that he proposes to seek an assessment of costs. He also says: "Given the manner in which CCK has attempted to resolve the fees dispute by serving a statutory demand and (I believe) by [instigating] the present proceedings to injunct Mr Rydon, I believe my relationship with CCK has irretrievably broken down. I have no intention of transferring the Walker litigation back to CCK, even if Rydon is ordered by the Court to cease acting." 25 I turn then to the first question, namely, whether there should be an interlocutory injunction to restrain Mr Rydon from providing legal advice or from assisting any other person to provide legal advice to any person who was in the twelve-month period prior to 1 December 2006 a client of the firm then conducted by the plaintiff. I should add in parenthesis that there has been a change to the structure of the firm, but that is not of any relevance to the present application, except for the form of order which should be made. 26 In Lindner v Murdock's Garage (1950) 83 CLR 628, a case concerning a restraint of trade affecting an ex employee, Latham CJ said (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 interest 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. " 27 It was submitted that, it was at least seriously arguable that the restraints against competition in the partnership agreement were invalid, insofar at least, as they sought to restrain Mr Rydon from providing legal advice to clients of the firm with whom he had had no connection. This argument was advanced in Bridge v Deacons [1984] AC 705 (at 709): " In the employer and employee cases the position is different because there is no transfer of goodwill. An employer can only protect himself against an ex-employee making illegitimate use of the connection or information acquired while he was an employee. The nature of the interest which it is legitimate to protect is different from that in a vendor and purchaser case. In the latter case the legitimate interest is defined by reference to the business in which the goodwill is being transferred and the whole of the connection of the business can be protected, whereas in employee cases protection is limited to the connections of the employee himself. " 28 In the present case, Mr Rydon did not acquire an interest in the goodwill of the partnership. Hence it was submitted that the present case is analogous to employer and employee type cases, and is distinguishable from cases involving restraints against solicitors where the solicitors did acquire a share of the goodwill on being admitted to partnership. 29 Whether this is so or not, I think there is a serious question to be tried that the covenant is valid both in its application to clients with whom Mr Rydon dealt when he was a partner, and in respect of other clients of the firm (Rouen & Ors v Ryan [2001] NSWCA 230 at [10]-[11]). 30 The position of a partner entitled to share profits but not liable for losses, and not entitled to a share in the capital of the firm, is sui generis. The validity of the covenant in restraint of trade, as it applies to him, is to be determined by asking what were the legitimate interests of the plaintiffs which they were entitled to protect, and then whether the restraint is wider than is reasonably necessary to afford that protection. It must be at least seriously arguable that the other partners of the firm had a legitimate interest in protecting the goodwill of the partnership, notwithstanding that there was no sale of that goodwill to Mr Rydon on his becoming a partner. 31 The balance of convenience favours the granting of the injunction to restrain the defendant from providing legal advice, or assisting others to do so, in respect of such clients. It could be difficult both to determine whether there had been any breach of the covenant and to assess damages for breach of the covenant, if the injunction were withheld. 32 However, there is a difficulty in that Mr Rydon says that he does not know the identity of all persons who were clients of the firm in the relevant period. It may be that: " The risk of an unwitting breach can be averted by the covenantor inquiring of prospects whether they have within the relevant period been customers of the covenantee. " (J D Heydon The Restraint of Trade Doctrine Second Edition, page 126). 33 However, the better course would be for the defendant to know in advance what is the scope of the restraint to which he is to be subject. The plaintiff does not oppose its being a condition of the injunction that the plaintiff provide to the defendant a list of the firm's clients for the appropriate period, provided that the defendant proffers an undertaking to the Court to keep the contents of that list confidential. The defendant has indicated through his counsel that he is prepared to proffer such an undertaking. 34 I therefore propose to make orders in accordance with paragraphs 1 and 2 of the short minutes of order handed up by counsel for the plaintiffs, amended in the way indicated during argument, by the insertion of the words "in the twelve-month period" where they appear in both of those paragraphs, but subject also to the orders providing that "they will operate upon the plaintiff providing to the defendant a list of the persons who were, in the twelve month period prior to 1 December 2006, a client of the legal firm then conducted by the plaintiff". In due course, I will note the undertaking to be given to the Court by the defendant to keep that list confidential. 35 I turn then to the third order sought by counsel for the plaintiffs, namely, an injunction against enticing employees of the firm. As I have said, there is no evidence that the defendant has attempted to entice away any employee of the firm, or that he intends to do so. The evidence does not warrant the grant of that relief. 36 Orders 1 and 2 will be made on the basis of the proviso in order 4 of the short minutes of order handed up by counsel for the plaintiff, and on the basis of the proviso in paragraph 5 of those orders. The question is whether VSA should be added to the clients specified in proviso 5. 37 It was submitted for the defendant that on the final hearing it would be arguable that the clause was invalid because it extended to restrain Mr Rydon from acting for a client in pending litigation, or in litigation which was about to commence. It was submitted that it was against the public interest for a solicitor to be so restrained. This view was expressed by Lord Denning MR in Oswald Hickson Collier & Co v Carter-Ruck [1984] AC 720 (at 723): " It was submitted by Mr Cullen that – as the relationship between a solicitor and his client is a fiduciary relationship – it would be contrary to public policy that he should be precluded from acting for a client when that client wanted him to act for him: especially in pending litigation. It seems to me that that submission is right. I cannot see that it would be proper for a clause to be inserted in a partnership deed preventing one of the partners from acting for a client in the future. It is contrary to public policy because there is a fiduciary relationship between them. The client ought reasonably to be entitled to the services of such solicitor as he wishes. That solicitor no doubt has a great deal of confidential information available to him. It would be contrary to public policy if the solicitor were prevented from acting for him by a clause of this kind. " 38 Following that decision, the Court of Appeal in England considered the appropriate formulation of an interlocutory injunction against a solicitor who acted in contravention of a covenant in restraint of trade, about the validity of which there was a serious question to be tried. In Edwards v Warboys [1984] AC 724, the Court of Appeal approved of the course taken by the primary judge to fashion an injunction in such a way that the interests of the solicitor's clients could be protected, if necessary, by a relaxation of the injunction in relation to any particular matter where that might be necessary to provide a practical solution to difficulties over the conduct of the client's litigation (at 727). 39 It would seem that the need so to fashion the injunction was at least substantially based on the statements of Lord Denning in Oswald Hickson Collier v Carter-Ruck. However, in this State and subsequently in the Privy Council, Lord Denning's observations have been roundly rejected (Sharah v Healey [1982] 2 NSWLR 223 at 226-227, and Bridge v Deacon s [1984] AC 705 at 719-720). 40 Mr Kidd, of counsel, who appeared for the defendant, has submitted, I think correctly, that the Privy Council only rejected those observations as a statement of a general rule. He submitted that in a particular case, the fact that the restraint clause could operate to prevent a solicitor from continuing to act in pending or immediately apprehended litigation could render the clause invalid. 41 There is a difference between considerations which affect the validity of the clause, and considerations which go to whether the clause should be enforced by final or interlocutory injunction. As at present advised, it seems to me that the weight of authority against Lord Denning's observations is so strong that the argument that clause 22 was invalid because it applied, or could apply, to Mr Rydon's acting for a client in pending litigation, would have very little prospect of success. 42 I have little doubt as to the validity of the condition so far as it affects Mr Rydon acting for VSA. The strength of that claim is it is a relevant matter to be taken into account on the balance of convenience, and I do so. However, it does not necessarily follow that because the clause appears to be valid, it would be enforced by final injunction or should be enforced by interlocutory injunction. 43 Mr Kidd correctly submitted that the legitimate purpose of the restraint was to protect the plaintiff's goodwill. So far as the goodwill associated with VSA is concerned, he submitted that it had irretrievably broken down. Mr Mastronardo's evidence, to which I referred earlier in these reasons, stated that expressly, and there was no reason not to accept him. 44 Mr Smallbone of counsel for the plaintiff, initially submitted that the grant of an injunction could serve two purposes. First, there was a chance, notwithstanding Mr Mastronardo's evidence, that he would direct VSA's business back to the plaintiff firm. The fact that proceedings are now on foot and are subject to a tight timetable, might well enhance that chance, because there are other solicitors in the plaintiff's firm who have worked on the matter. If Mr Rydon is restrained from working on the matter, there would be a strong incentive on VSA to take the work back to the plaintiff. 45 It was also submitted that the grant of such injunction might provide the chance for the plaintiff firm to receive payment of outstanding accounts, or for its outstanding accounts to be settled more expeditiously than would otherwise be the case. In the end, I did not understand counsel to rely upon this last matter. It is not obvious that that would be a legitimate use of the injunction. 46 Before concluding this point, I should deal with the second submission of Mr Kidd, namely, that the defendant has a defence of acquiescence and laches. While I do not positively exclude such a defence at the final hearing, where the evidence may be different from what it is at this stage, it does not appear to me that on the present application this defence has substance. 47 The evidence is that Mr Hurren and the plaintiff firm made the appropriate demands on Mr Rydon immediately they became aware that Mr Rydon was acting for VSA. There was no delay in commencing proceedings after attempts to obtain appropriate undertakings failed. 48 Returning then to the question of whether an injunction should be given or whether the plaintiff should be left to its claim for damages, there is the further discretionary factor that VSA and Walker Corporation are both subject to a tight timetable to bring their litigation ready for hearing. Mr Smallbone suggests that VSA is not in a position to complain if it faces other difficulties in complying with that timetable, or if it faces hurdles in conducting the litigation. He submits this is a position of its own making. It is seeking to get the benefit of work done for it by the plaintiff firm for which it has not paid, by holding out to the firm the prospect of retaining the work, when it had no intention of giving it the work after Mr Rydon left. 49 Whilst these are not irrelevant considerations, they do not displace the force of the defendant's case that the current litigation in the Commercial List will be significantly disrupted if Mr Rydon is restrained from acting. Indeed, although neither party relied on it, it is relevant also to take into account the position of the defendants in the proceedings brought by VSA. They also would be affected by disruptions to the timetable in that litigation. 50 If, as Mr Mastronardo says, the plaintiff would not be retained in the litigation, even if an injunction is given, no purpose would be served by the injunction. The plaintiff would be entitled to its claim for damages, and the quantification of its claim for damages would not be affected by the grant or withholding of the injunction. 51 I do not consider that the chance of VSA retaining the plaintiff's services is more than negligible. Mr Mastronardo's sworn evidence as to his intentions is not objectively improbable. One can well understand a corporate client feeling aggrieved on receipt of a statutory demand for unpaid legal costs. The very circumstance of this dispute has clearly created tension and an antagonism between VSA on the one hand, and the plaintiff firm on the other. Whether for good reason or not, it is most unlikely that VSA would have confidence now in the plaintiff firm if it were to be retained. 52 Accordingly, I do not consider that the circumstances warrant the grant of an injunction in terms which would restrain Mr Rydon from continuing to act for VSA. 53 I will make orders in terms of the orders proposed in the short minutes handed up by Mr Smallbone, but adding VSA as the fourth client in paragraph 5. 54 For these reasons, I make orders in accordance with the short minutes of order which I initial and date and place with the papers. I order that the plaintiff's notice of motion filed on 20 February 2007 be otherwise dismissed. I order that the costs of the plaintiff's notice of motion be costs in the proceedings. 55 I stand over the proceedings to the expedition list on 9 March 2007. I direct that any notice of motion for expedition, and supporting affidavit, be filed and served by Tuesday 6 March 2007. 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