The Victorian Supreme Court’s recent decision in Idameneo (No. 123) Pty Ltd v Deady [2013] VSC 727 (Idameneo) demonstrates that Victorian courts will look beyond pre-agreed liquidated damages clauses in commercial agreements to determine the adequacy of remedies available for a breach of a restraint of trade clause.
Facts
The most important facts of Idameneo were that:
- In 2007 Dr. Deady (Deady) sold his Epping medical practice to the plaintiff, and became an employee of the plaintiff’s own medical practice.
- A condition of the sale of business was that Deady agreed not to leave the plaintiff’s practice and setup a competing practice (a restraint of trade clause).
- Except in exceptional circumstances (i.e. providing emergency medical treatment) if Deady breached the restraint the contract provided that he would pay an agreed percentage of any income received as a consequence of the breach to the plaintiff (a liquidated damages clause).
- In October 2013 Deady gave notice that he intended quit, and subsequently set up a competing practice near the plaintiff’s practice, well within the boundaries of the restraint area.
- The plaintiff sought to preserve the goodwill purchased in the 2007 sale of business by obtaining an interlocutory injunction against Deady.
Obtaining Interlocutory Relief
An interlocutory application is made when a plaintiff seeks to prevent further damage to their interest by obtaining an order that the defendant not do a particular thing prior to the conclusion of a trial.
In seeking a grant of injunctive relief a plaintiff must demonstrate that on the balance of convenience, restraining a defendant from acting in a particular way will ensure that irreversible damage is avoided (Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57, ‘O’Neill’).
Often, a plaintiff seeking interlocutory relief will have to provide an undertaking to the defendant that it will indemnify them against their loss resulting from the injunction in the event the Court decides at a final trial ( after reviewing all the evidence) that the plaintiff was not entitled to injunctive relief.
Because an interlocutory grant is made without full view of all relevant facts, the Courts have established a test most recently stated in O’Neill requiring a plaintiff prove two elements in order to obtain relief:
A. That there is a serious question to be tried
In the present case, it was clearly established that there was a ‘serious question to be tried’ at hearing.
On the evidence presented to the Court, Forrest J was satisfied that Deady’s actions demonstrated a clear breach of the contract of sale and therefore there was a serious question about what damage had been caused by his breach, and what remedy could be available to the plaintiff.
B. That the Balance of Convenience permits injunctive relief
Deady argued that it would be inappropriate to impose an injunction when, on the face of the evidence, damages seemed to be an adequate remedy for the plaintiff’s loss.
Particularly, Deady pointed to the existence of the liquidated damages clause to demonstrate that the parties had previously considered damages as an appropriate remedy for any breach of the restraint clause.
Deady argued that in a previous case (Idameneo (No. 123) Pty Ltd v Butterworth [2013] NSWSC 356, ‘Idameneo 1’) the same plaintiff had sought and failed to obtain an injunction in very similar circumstances against another former employee Doctor because the Court in that case was unwilling to step into the shoes of the parties and alter the parties’ agreement.
The Outcome
Despite the considerable case law supporting Deady’s argument, Forrest J distinguished the present case from Idameneo 1 and ordered that an interlocutory injunction be granted to the plaintiff.
In reaching his decision, his Honour took account of the following matters:
- That the restraint was inserted into the agreement for the benefit of the plaintiff, who had paid a considerable amount for the goodwill of Deady’s business;
- That the restraint was relatively modest – it only extended for 10 km from Deady’s old practice, and the plaintiff’s current practice, and therefore Deady would not be unduly deprived of opportunities to practice medicine elsewhere
- That the likely loss of patients that would result from Deady being permitted to practice within the restraint area could exceed the value of the liquidated damages; and
- That it would be difficult for the Court to quantify the plaintiff’s loss, and therefore make an accurate estimate of the damage suffered (so much so, that Forrest J was not convinced that the agreed liquidated damages could provide an accurate gauge of the plaintiff’s actual loss).
However, beyond the difficulty of calculating the plaintiff’s loss Forrest J also accepted the argument that Deady should be prevented from breaching his promise at the cost of damages, on the basis that it would be contrary to Deady’s promise and would undermine the intention of the parties.
Implications
Forrest J’s decision is a useful guide to how the Supreme Court considers restraint clauses to be more than a mechanism for recovering damages.
His Honour’s decision reflects comments made by the High Court in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272. In that case the High Court flatly rejected the idea that a party to an agreement may elect to make an ‘economic breach’ (i.e. deliberately breach its promise) where the cost of compliance with their agreement exceeds the cost of breach.
Unlike in Tabcorp, the evidence in Idameneo indicated that Deady’s decision to breach the restraint was not premeditated– his evidence was that he had chosen to leave his employment due to irreconcilable differences with his employer. By contrast, in Tabcorp the defendant had entered into a lease agreement with an intention, or at least in contemplation that it would breach a restrictive covenant and simply pay for its breach at a later time.
His Honour summarised his position by reference to an extracted passage of Brereton J in Tullett Prebon (Australia) v Simon Purcell [2008] NSWSC 852:
While the fact that there is a “liquidated damages” provision arguably removes one factor which would otherwise tell in favour of the inadequacy of damages – namely, difficulty of calculation – it does not make it any more just that Mr Purcell should be able to escape from his contractual obligations at the price of paying damages. Equity holds parties to their agreements, rather than allowing them to escape from them at the price of damages. [102]
Economic Breach in Context of Liquidated Damages Clauses
Liquidated damages are often used by purchasers to manage risk of a seller injuring their business’ goodwill after settlement by pre-defining the damage attributable to a breach, making the process of recovery more convenient and cost effective. Typically sellers are reluctant to accept such a level of exposure, and will usually only agree to the inclusion of a liquidated damages clause when they are bargaining from a position of weakness. As such, liquidated damages clauses typically benefit the purchaser exclusively.
Idameneo may foreshadow a shift away from the assumption that the presence of a liquidated damages clause in an agreement is prima facie evidence that damages are an adequate remedy in that case. For purchasers, Idameneo has arguably created a more robust protection in restraint of trade clauses by relaxing the need for plaintiffs to demonstrate the inadequacy of damages before they can obtain injunctions to enforce their restraints.
Conversely, Idameneo is concerning for sellers who may find themselves in the position that a grant of injunctive relief is now more readily obtainable against them. This may lead to scenarios where a restraint clause causes more damage commercially than an award of damages might (and ultimately more cost in time and legal fees to settle disputes than by relying on a pre-agreed estimate of loss).
Pointon Partners have extensive experience in advising on, and drafting restraint of trade clauses. If you are seeking to sell or purchase a business and wish to know more, please feel free to contact Michael Bishop of our office on 03 9614 7707.
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