The New South Wales Supreme Court has ordered a former business owner pay $533,000 for breaching a restraint of trade clause after selling his business.
The dispute began after Andrews Advertising was purchased by Adcorp Australia for $4.4 million.
Andrews Advertising relied heavily on the close commercial relationship between one of the business’ owners, David Andrews, and two key clients.
Andrews was required to sign a restraint of trade clause for a period of six months upon the sale of the business.
But the court found while Andrews was still employed by Andrews Advertising, he diverted client work to a company operated by his wife and also performed work for this same company.
Then as soon as Andrews stopped working for Andrews Advertising he took on work for one client in breach of his post-employment restraints.
The two key clients left Andrews Advertising and the business ceased to trade the next month.
Proceedings were commenced against Andrews, together with his wife and other defendants.
The court upheld the six month non-compete restraint in Andrews’ contract even though it acknowledged doing so would effectively prohibit Andrews from using his professional skills in advertising and to earn a livelihood in Australia for six months.
In the context where these restraints were entered into as part of the sale of Andrews Advertising to Adcorp, and where there were key client relationships for which Andrews was responsible, the court found that this form of restraint was reasonable and enforceable.
The court awarded damages of $300,000 taking into account the revenue gained by the business of Andrews’ wife during the period.?
In addition, the court ordered Andrews to pay $233,000, the profit on the “substantial amount of work” he diverted away from Andrews Advertising during the course of his employment.
Andrews’ wife was found to have assisted her husband in this breach of his fiduciary duties and was therefore equally liable for this amount of money.
Stephen Trew, partner at law firm Holding Redlich, told
the decision highlights the importance of having procedures in place to protect client revenue, including in respect of businesses that have been recently acquired.
“To alleviate the risk of a similar fate to Andrews Advertising, businesses must implement a range of strategies, both legal and commercial, to protect both established and newly acquired client relationships,” he says.
“One key strategy that businesses should consider is ensuring that there is more than one point of contact between key clients and representatives of the business.”
Trew suggests the following practical steps to protect client relationships:
Have more than one point of senior contact with any key client;
Determine how work can be performed by persons other than the key contact whose business is being acquired; and
Link payment to client retention and consider how best to link consideration for purchase to client retention.
While Andrews Advertising was ultimately successful in its claim, Trew says the fact that it ceased trading some four years after Adcorp bought it and a month or so following Andrews ceasing to be employed with the business shows the significant risk to a business where key individuals hold tightly the key client relationships.
“In those circumstances, it is important to consider the range of commercial and legal strategies available in order to protect the business and mitigate the risks of client loss,” he says.
“Restraints of trade and other relevant clauses in employment contracts are only one of the available strategies and must be considered together with a range of other proactive steps to protect the business.”