• Supreme Court Upholds Restraint Clause in Business Sale and Service Agreementsh
  • October 27, 2015 | Author: Adam Salter
  • Law Firm: Jones Day - Sydney, New South Wales Office
  • In Richmond v Moore Stephens Adelaide Pty Ltd [2015] SASCFC 147 (29 September 2015), a Full Court of the South Australian Supreme Court rejected a claim that a restraint clause included in a number of business sale agreements was unenforceable.

    Factual Background. An accountant agreed to sell his practices and its services over a four-year period. The Business Sale and Service Agreements ("Agreements") contained a cascading restraint clause which operated for four years, three years, two years and one year after completion of the sale within a 10-kilometre radius of the business. Such cascading clauses allow employers to enforce a lower-level restraint if a broader restraint is deemed too harsh, without the entire restraint clause being unenforceable.

    The accountant claimed that the purchaser, Moore Stephens, failed to pay him an instalment of $600,980 for the purchase of the business. The purchase price was dependent upon the level of achieved fees over the first three years, and disputes had arisen in relation to the amount of fees which had been achieved.

    Legal Background.
    The accountant argued that the restraint clause in the Agreements should not be enforced because:
    • Moore Stephens breached an essential term of the Agreements by failing to pay him part of the purchase price, meaning that the accountant was entitled to terminate the Agreements; and
    • the restraints were void for uncertainty and because they constituted an invalid restraint of trade.
    Decision. Justice Blue, with whom Kourakis CJ and Stanley J agreed, decided that while Moore Stephens was in breach of the Agreements by failing to pay the correct amount for the purchase, those breaches did not entitle the accountant to terminate the Agreements. As such, the Agreements including the restraint clauses remained on foot.

    The accountant argued that the restraint, which prevented him from soliciting the custom of or dealing with any person with whom he had had '"direct or indirect dealings", was too uncertain to be enforceable. However, Blue J was of the view that that phrase had a clear connotation, even though an inquiry would need to be conducted to determine whether the accountant had had "direct or indirect dealings" with a client.

    Justice Blue also decided that the scope of the restraint was reasonable with regard to the interests of the parties. Evidence had been given that the accountant had long-standing relationships with his former clients and that two years were needed to build up a relationship with a client. As such, restraints going beyond one year were reasonable in the circumstances.

    Lessons for Employers. This case emphasises that the enforceability of restraints depends on the factors impacting upon each individual business. To be enforceable, restraint clauses need to be sufficiently specific and certain to allow the reader to determine the scope of the restraint. Further, restraint clauses will be enforced only to the extent that they are reasonable in the circumstances with regard to the nature of the business (and the business interests they seek to protect).