Most sale of business contracts include a restraint of trade clause. A ‘restraint of trade clause’ is designed to protect the goodwill of a business sold by the vendor to the purchaser. Typically, a restraint of trade clause will prohibit the vendor from carrying on a competing business (or engaging within a competing business) within a certain geographical area or radius over a given time period.
We regularly hear misapprehensions to the effect that “restraints are unenforceable because you cannot prevent someone earning their livelihood”. It is important to appreciate that there are two fundamental different fact scenarios in which restraints are imposed.
The first relates to an employment restraint, where an employee is subject to a restraint, generally included within their employment agreement. These restraints are typically less enforceable, and where they are enforceable, they are enforced for much shorter periods of time and less geographic area, if any geographic area at all. (The current trend for this kind of restraint in professional services is to protect clients of the business, rather than a geographic restraint.)
The second type of restraint is part of a sale of business, where the courts are much more prepared to enforce longer restraints and for larger geographic areas. The misapprehension referred to above is much more likely to apply to an employment restraint. There are of course cases where both an employment restraint and sale of business restraint apply, often running concurrently, (although the employment restraint will generally expire well before the sale of business restraint).
It is a fundamental principle of all restraints of trade that they are presumed to be unenforceable, unless the restraint is necessary to protect the goodwill of a business. The courts will find restraints necessary in appropriate situations, where the restraint has been carefully and effectively drafted. (For this reason, it is not sensible to include only an overly wide and lengthy restraint clause.)
The Full Court of the South Australian Supreme Court in Richmond v Moore Stephens Adelaide Pty Ltd  SASCFC 147 held that a restraint clause featured in a series of Business Sale and Service Agreements (“Agreements”) was both valid and enforceable. The case is especially interesting because the facts are similar to many restraint clauses which we see in accounting and financial planning cases, and because it is a decision by the full bench of a Superior Court.
Facts and background
Geoffrey Richmond, a chartered accountant, and his company WKYA Consulting Pty Ltd (“WKYA”) entered into the Agreements with Moore Stephens Adelaide Pty Ltd. The Agreements were for the acquisition of Mr Richmond’s accounting practice with accompanying services over a four-year period. The purchase price of the business was payable by instalments and depended upon the level of achieved fees over the first three years. Disputes arose as to the quantum of fees achieved and payments made.
The Agreements included restraint clauses whereby Mr Richmond agreed not to solicit or deal with clients of the acquired business. The clause operated for four years, three years, two years and one year after the completion of the sale within a ten-kilometre radius of the business. This is an example of a cascading clause, which allows a lesser restraint to be enforceable in the event that the stricter application is held by the Court to be unreasonable. This allows for flexibility and prevents the entire clause being unenforceable if the Court determines that any of the larger restraint provisions are unenforceable.
Moore Stephens sued Mr Richmond in the District Court to enforce the restraint clauses. The trial judge held the clauses were enforceable and granted an injunction restraining Mr Richmond from soliciting or dealing with named clients or employees with whom he had dealings on behalf of the business.
Mr Richmond appealed to the South Australian Supreme Court, arguing that the restraint clauses should not be enforced on the grounds that:
The Court held, that although Moore Stephens was in breach of the Agreements by failing to pay the correct purchase price, the restraint obligations of Mr Richmond were not dependent on the payment of interest and were therefore valid and enforceable, even if Moore Stephens had breached its obligations.
Mr Richmond argued that language included in the restraint clauses, such as “direct or indirect dealings” and “the Principal has actively pursued,” were too uncertain to describe interactions with clients in his capacity as a consultant. The Court held that the restraints were not too vague to be enforceable as the phrases had recognisable connotations. The fact that an inquiry would need to be conducted to ascertain whether Mr Richmond had “direct or indirect dealings” with clients did not hinder this finding.
The restraint was reasonable with regard to the interests of the parties as evidence had been provided that two years were needed to build a relationship with a client, meaning a restraint extending beyond one year was practical in the circumstances.
Importance of the judgment: reminder to business vendors and purchasers
This judgment acts as a reminder to business vendors and purchasers that restraint of trade clauses will be enforced only to the extent that they are reasonable in regards to the nature of the business, including the interests of the parties that the restraint of trade seeks to protect. This can be seen through the decision of the Court in applying the length of time required to build a relationship in the accounting industry, specific to the factual circumstances of the case.
How we can help you – drafting and disputes
Accountants and Financial Planners actively engage us to draft restraint of trade clauses as we comprehensively understand and are fully aware of the inner workings of both the accountant and financial planning industry. The sale or purchase of a business can be challenging, especially in these industries, and each sale or purchase is unique, adding to the pressure to ensure the restraint of trade clauses contained within the sale of business agreement remain rock solid and enforceable.
Our collective experience and knowledge provides us with the insight to actively enforce restraint of trade clauses should a vendor engage in an activity that contravenes their restraint of trade clauses contained within their sale of business agreement. We have experience in relation to obtaining and defending urgent injunctions for immediate restraint disputes. Should you require assistance in this area please contact Fiona Halsey at Halsey Legal Services.
If we could say one thing
We are always surprised by how often an entity which wants to enforce a restraint cannot locate a copy of the agreement, (both employment or business sale). If you have obtained a restraint from someone, the document containing the restraint is potentially worth a great deal. Make sure you have a signed copy, scan it to a secure place, and maintain the scanned and hard copies securely.