Restraints of Trade Explained

Commercial

A restraint of trade provision refers to a term in an employment contract that seeks to restrict the actions of an employee when they cease working for an employer. Restraints of trade provisions are commonplace in nearly every employment contract, but it can be difficult to understand how to construct a term that is both effective and enforceable.

A restraint of trade provision is Prima Facie void but will be upheld where the party seeking to enforce the provision demonstrates the restraint is no wider than is reasonably necessary to protect its legitimate interests (Kearney v Crepaldi [2006] NSWSC 23). The purpose of a restraint of trade is for the employer to protect against things that might be considered assets of the business, such as trade secrets of client connections, the employer is not permitted to simply protect itself against competition from an employee (Stenhouse Australia ltd v Phillips [1973] UKPC 1)

Thus, in writing a restraint of trade provision into the contract, the employer must consider what legitimate interest the restraint is protecting and what would be reasonable to ensure its protection.

Some recognised interests include:

  • Confidential Information
  • Customer connections
  • Stable workforce

In Wallis Nominees (Computing) Pty Ltd v Pickett [2003] VSCA 24 the Victorian supreme court held that non solicitation depended on two factors: an employee being in a position to gain client trust and confidence as well as the relationship between employee and client being such that there is a possibility of a departing employee taking the client’s business.

In Cactus Imaging Pty Ltd v Glenn Peters [2006] NSWSC 717 a stable workforce was recognised as an interest in its own right. Previously employers had to protect themselves against former employee’s recruiting from their ranks through cleverly worded provisions relating to confidential information or customer connections.

Once a legitimate interest has been recognised, the restraint of trade must only restrain an employee as far as is reasonably necessary to protect that interest (Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535). Reasonableness is to be assessed at the time the contract is being entered into (Hanna v OAMPS Insurance Brokers [2010] NSWCA 267) and is to take into consideration what is reasonable for the parties concerned and the public interest (Then there Were Three Pty Ltd v Douglas [2014] NSWSC 1011).

To provide an example, in the case of Sportsbet Pty Ltd v Carpanini & Anor [2014] VSC 166 the former Client Services manager was subject to a restraint clause that restrained her from:

“providing services to, participating in, being interested in, assisting with or otherwise being directly or indirectly involved in, engaging in, being concerned or interested in any business that competes with or is likely to compete with the business of the Beneficiaries in Australia in any capacity for a period of 6 months”

The court held this provision to be much too wide as it would prevent her from acting even as a cleaner or buying shares in a competitor’s company.

As a general rule, the more senior, tenured, and experienced the employee is the more extensive their restrain can be. However, as reasonableness is measured at the time of contract formation, this can mean senior employees who have been promoted but not signed a new employment contract might still be subject to restraints reasonable for a position lower than that which they hold. It is thus good practice to reassess employment contracts whenever a worker changes positions within the business.

Where a restraint clause is found to be unreasonable, the court can determine the term void to the extent that it is unreasonable. As courts are loathed to impose new terms into a freely negotiated contract, this can mean the entire clause is rendered void. A popular way to navigate this issue is known as a ‘cascading term’, a restraint clause that provides multiple level of restraint (i.e. 12 months, 9 months, 6 months, and 3 months). If a 12-month restraint is found unreasonable, the court can simply sever the sub clause saying 12 months from the contract and keep the provision intact.

Resultantly, restraints of trade are an important yet difficult to navigate area of employment contracts. If you are looking to update your employment contracts or find yourself the subject of a restraint of trade, it could be beneficial seeking legal advice as to the operation of the provision and what you may or may not be permitted to do under its terms.

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