Can a restraint of trade apply to referrers?


Posted By on 30/11/17 at 7:53 AM

By Paul Welling (Principal Solicitor) and Josephine Mammone (Trainee Lawyer)

We recently had cause to consider a restraint of trade clause regarding referrers.  The decision in Two Lands Services Pty Limited and 1 Ors v Gregory Robert Cave [2000] NSWSC 14 considered the validity of a referrer restraint.

Background

Mr Cave was employed as a finance consultant in a mortgage origination business, Two Lands Services Pty Ltd (Two Lands).  His employment was terminated and he was subsequently employed by a similar competing business, The Mortgage Professionals.

Two Lands “relied heavily upon an identified group of individual accountants as ‘referrers’ of business”. The relationship with referrers was “crucial to the Plaintiff’s business and its future success”.

Two Lands also kept a list of referrers which included their grading based on their likelihood of referring business, which Mr Cave took.  Mr Cave also contacted some of the referrers.

The relevant provisionrestraint of trade

Mr Cave’s contract of employment with Two Lands contained the following clause:

  1. Confidentiality

……

4.2 The employee agrees not to contact nor conduct business with any referrers of clients of the Company or any clients of the Company either directly or indirectly for a period of at least twelve months from the date of termination of employment of the employee of the Company, without the consent of the directors of the Company in writing [emphasis added]

Was the restraint of trade valid?

Santow J considered “referrer” to include “anyone who had, during the term of the relevant employment, actually referred a client or of whom, already cultivated, it could reasonably be expected would refer a client in the foreseeable future. This recognises that cultivation of referrers on the evidence is a long-term process which does not yield immediate results and is indeed now yielding substantial results only after the employee has left.” [60]

At [81] – [82] Santow J held that the restraint of trade was valid within the meaning of s 4(1) of the Restraints of Trade Act 1976 (NSW):

[81] Turning to the scope of the relevant restraints as they apply to the particular claimed breaches, the referrer restraint does not fit aptly with the earlier quoted test proposed by Professor Blake. Here, one is not dealing with replacement or supervision of one blue-collar worker with another, readily able to master the job. Rather we are dealing with the replacement of a referrer relationship that requires considerable time and effort to establish and whose fructification in terms of referrals requires a relatively long lead-time. Indeed if Professor Blake’s test of the time taken for a reasonably competent new employee to master the job were applied, that time period when related to a referrer would necessarily have to take into account both the period of time required to create the relationship and the time for it to fructify; twelve months would not be an unreasonable estimate of that period.

[82] Thus I am satisfied that the twelve months stipulated does not exceed a reasonable period, looking at reasonableness as between covenantor and covenantee. Looking more broadly to the public interest and in particular as affecting the Defendant’s new employer, Mortgage Professionals, its competitive capacity is simply denied the embargoed springboard that unconstrained access to the Plaintiffs’ referrers would otherwise provide. It certainly does not drive Mortgage Professionals out of business so as to deny the public the benefit of that competition. No such submission was put to that effect. The public continue to have access to the mortgage origination services provided by Mortgage Professionals with many other competitors in the market.

Subsequent consideration

Somewhat surprisingly, this is not a common form of restraint clause, and a restraint of trade in this form has not been considered by a Court since the Two Lands case.

Assuming that a business operates in an industry where a relationship with referrers is “crucial”, Two Lands suggests such a clause is likely to be enforceable.

If you would like us to review your employment restraints or have any questions about drafting restraints, please do not hesitate to get in touch.

Principal Solicitor

Paul Welling joins KHQ as the leader of our litigation team. He spent over a decade at a top tier national law firm and is a highly experienced litigator specialising in all areas of complex commercial... Read More