28/06/2012

Our defendant client recently had a win defending a claim for damages resulting from a breach of restraint with their ex-employer.  The victory in both the District Court and the Court of Appeal is instructive.

The plaintiff employer sought $180,000 in damages for breach of a post-employment restraint based on the sale of the financial planning practice shortly after our client was terminated and had to forgo 3 times annual trailing commission in respect of the clients who had left and taken their business to our defendant client and elsewhere.

On behalf of our client we argued that the clients who left the employer were “personal clients” and not subject to the restraint because of an earlier agreement with the employer that such clients would be excluded.

The District Court Judge did not agree and held that the clients were subject to the contractual restraint. 

We also argued that the employer should not be entitled to the loss of the purchase price on the sale of the practice as that loss was too remote and not contemplated by the employer and our client at the time our client commenced employment with the employer.

On this ground we were successful. The District Court held that the employer was not entitled to the claim for the loss of the purchase price, being 3 times the annual trailing commission but only a small amount for the loss of actual commissions.

The Judge said:

“The plaintiff agreed to sell in May 2009, three months after termination of the defendant’s employment, knowing at that time that there was a real prospect that a large number of those clients would not at least at the end of the twelve month period be clients of the plaintiff and hence of the purchaser.”

“(T)he combination of the defendant’s conduct and the sale by the plaintiff of the business and the failure to service those clients all combine to bring about what would have been the loss of income to the plaintiff in commissions”

“The loss is exceptionally difficult to calculate because many of the clients would not have continued with the plaintiff because (1) [our client] was not there, (2) because the plaintiff was dilatory in servicing their requirements, (3) their commissions had been on-sold and (4) [our client] was actively pursuing them.”

The Court only ordered $20,000 plus interest on the original claim of approximately $180,000.

Equal in significance was that as a result of the plaintiff only having limited success on the claims, the Judge ordered that each party pay its own costs.  That is, the plaintiff could not recover any costs from our client for the court proceedings. 

The Judge held: “because much of the time spent and ventilated on dealing with the damage component of the second leg of the plaintiff’s claim in which the plaintiff was unsuccessful, in my view it is appropriate that the Court make no order as to costs.”

The employer subsequently appealed in the Court of Appeal. The appeal was dismissed and the employer was ordered to pay our client’s costs of the appeal.

The relatively small amount of the judgement plus the payment of our client’s legal costs of the appeal constitute a substantial success for our client who at one stage was looking at a claim and legal costs of hundreds of thousands of dollars.

Although each case is dependent on its facts, this case shows that a defence to a restraint can be partially successful, if not on liability then at least on the quantum of damages.  Litigation should be avoided if at all possible but if you have no choice then at least ensure you have quality legal representation to minimise the downside.

If you have any questions in relation to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.