I INTRODUCTION

This article considers restraint of trades in employment law, which often take the form of non-compete or non-solicit clauses. It outlines the elements that must be established for the clause to be valid, how employers seek to enforce the restraint, and the defences available to employees. Outlined in Pt 4 is a list of remedies that are commonly sought to protect the interests of the parties and further orders that may be imposed by the courts.

II LAW OF RESTRAINT OF TRADE

A Common Law Rule

At common law, restraint of trade clauses that impose obligations on employees after their employment terminates are prima facie void.[1] This blanket rule applies on the footing that it is in the public interest to foster employment and preserve free trade but is not without exceptions.

B The Exception

In the NSW jurisdiction, the statutory application of section 4(1) of the Restraints of Trade Act 1976 (NSW) (‘the Act’) has modified the common law. Where an alleged breach can be properly construed to infringe the terms of the restraint imposed by the employer, the restraint will be deemed valid to the ‘extent to which it is not against public policy, whether it is in severable terms or not.’[2]This assessment is made at the time the employee entered into the contract and by reference to what the restraint entitled or required the parties to do.[3] Importantly, the onus rests on the employer to establish the restraint is not against public policy, and otherwise valid, as it does no more than what is reasonably necessary to protect a legitimate interest.[4]

First Limb: Legitimate Interest

The Court generally adopts a strict approach to enforcing a restraint in employment contracts given the disparity in bargaining power between the employer and employee. Nevertheless, the Court will afford the employer protection under the restraint for a ‘legitimate interest’, including:

1.   Goodwill, that is, ‘the benefit and advantage of the good name, reputation, and connection of a business’;[5] and

2.   Protectable confidential information or trade secrets.[6]

Second Limb: Reasonableness

The Court in Cadgroup Australia Pty Ltd v Snowball recognised that although there is a public interest in contractual performance, a restraint will not be valid to the extent that it affords the employer with more protection than is reasonable.[7] NSW courts are empowered by s 4(3) of the Act to read down excessive restraints to what is reasonable, provided the clause is sufficiently clear and severable. This does not empower the court to re-draft the clause, but rather ‘amputate’ its application.

Reasonableness is assessed by reference to one or more of the following factors:

●      Scope of Activities Restricted

The restraint must be limited to activities that threaten the employer’s legitimate interests as the Court is unlikely to uphold overly broad clauses that are aimed at suppressing competition.

●      Duration

The period of restraint must be no longer than necessary to protect the employer’s interests. For example, this may be until such a time where the confidential information has lost its quality of confidence.

●      Geographic Reach

The geographic area captured by the restraint must align with where the employer operates and where the employee has had influence.[8]

●      Nature of the Employee’s Role

In Pearson v HRX Holdings Pty Ltd, the Court upheld a restraint that prevented the employee from working in any capacity for a competitor. The scope of the restraint was justified when assessed against the employer’s seniority and customer connections.[9]

III BREACH OF THE RESTRAINT

A Employer Seeking to Enforce a Restraint

Employers seek to enforce restraints by pleading and proving their legitimate interest with specificity and demonstrating reasonableness with targeted restraint terms as per the two-limbed test above.

B Employee Seeking to Resist a Restraint

The employee may rely on the following defences to refute the argument that the restraint is enforceable.

The employment contract does not apply.

A restraint clause may not apply if the contract containing the restraint is no longer operative due to the fact that the employment relationship has materially changed, or a new agreement, including a subsequent oral agreement, has had the effect of superseding the original. A material change in the employment relationship captures instances where there has been a change in the employee’s position, ultimately supporting the argument that the contract has been varied.[10]

The employer repudiated the contract containing the restraint.

A restraint of trade clause is unenforceable where the employer themselves have repudiated the contract and the employee accepts such a repudiation. The rationale for the principle lies in the presumption that it was the objective intention of the parties to invalidate the restraint, the right to restraint is not unconditionally accrued by the employer until the contract is performed, and it would be contrary to public policy to allow enforcement after an acceptance of repudiation.[11]

A construction or drafting issue renders the restraint unenforceable.

An employee may rely on the fact that restraint of trade clauses must be drafted with precision, and where the language is found to be ambiguous, grammatically incorrect, or structurally unsound, the restraint will not be upheld by the court.[12] The court’s exercise is to test the outer limits of the what the restraint entitles or requires and assess whether this meets the requirement of reasonableness.

The restraint was procured through misleading or deceptive conduct.

It is possible, although difficult, for a contract containing a restraint of trade term to be rescinded under the Australian Consumer Law 2010 (Cth) (ACL) where the contract has been procured by misleading conduct such as misrepresentation.[13] However, this would require the employee to prove reliance on the representation which is often safeguarded by the ‘entire agreement’ clauses found in employment contracts which prohibits reliance on representations made prior to or outside the contract.

The employer acquiesced in the breach of the restraint.

If the employer has encouraged the employee’s breach of the restraint, they are prevented from enforcing the clause. This defence is challenging where there are several restraints; the argument that one occasion of encouragement by the employer amounts to consent of future breaches must be rejected.[14]

The restraint exceeds the boundaries of reasonableness.

Employees can resist enforcement by reference to the reasonableness of the restraint (discussed in Pt 2B above). A restraint that is unreasonable in scope, duration, or geography cannot be enforced, nor can it be read down if it is unclear. Employees may also raise public policy arguments, such as practical inability to earn a living or lack of consideration in contract formation.

IV REMEDIES

A Injunctive Relief

Injunctive relief is commonly sought in restraint of trade cases where the employer wishes to prevent an employee working for competitors. The relief may also be sought against new employers or third parties who facilitate breaches. Types of injunctions are outlined below.

●      An interlocutory injunction is the first course of action that should be taken to prevent and preserve the status quo before a final trial.[15]

●      Permanent injunctions may be sought where the employer is concerned about irreparable ongoing or threatened breaches.[16]

●      Ex parte orders may also be pursued if there is a real risk of destruction of evidence.

●      Springboard injunctions seek to neutralise the unfair advantage a party may gain from prior breaches.[17]

The following issues are to be determined when considering whether the Court should grant an interlocutory injunction to enforce a restraint of trade:[18]

●      Has there been a timely application for interlocutory relief?

●      Is there evidence of a breach of the restraints by the former employee?

●      Is there an arguable case that the restraint covenant is valid as read down under the Act?

●      Does the balance of convenience lie in favour of the granting of the injunction to the employer?

●      Are damages an adequate alternative remedy to the granting of an injunction?

Practically, injunctive relief is difficult to obtain; the applicant must establish a strong prima facie case and that, in light of the circumstances, damages alone are an inadequate remedy.

B Damages

Compensatory damages aim to place the employer in the position they would have been in had the breach of restraint not occurred. It covers actual losses such as lost profits, recruitment costs, and other reasonably foreseeable consequences.

Contracts may also include liquidated damages clauses, but these will only be enforceable if they represent a genuine pre-estimate of loss. If the clause is struck down as a penalty, the underlying contractual restraint can still remain valid, allowing the employer to pursue general damages or seek injunctive relief.

In some cases, the innocent party may elect an account of profits, which focuses on removing the gains wrongfully obtained by the breaching party. However, it must be noted that double recovery is not permitted.[19]

C Delivery Up Orders

The employer may seek a delivery order where it anticipates further misuse or dissemination of sensitive business information.[20]This may include, but is not limited to, the return or destruction of physical and electronic documents, and other proprietary materials. 

D Accessorial Liability

Competitors or third parties who knowingly induce breach of contractual restraints may be held liable.[21] The employer will largely rely on inferential evidence which is sufficient to establish inducement.  

E Undertakings

Employers may accept or propose undertakings to ensure compliance with restraints. This ensures that employers avoid the associated risks and costs involved in litigation.

F Costs

The court may award the employer costs where it has invested significant money in litigating the matter and had a successful outcome.

If the employer fails to establish the breach, costs may be awarded in favour of the employee and other defendants to the matter where third parties have been joined to the proceedings.

 V FOOTNOTES

[1] Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535, 565.

[2] Restraints of Trade Act 1976 (NSW), s 4(1).

[3] Woolworths Ltd v Olson [2004] NSWCA 372, [40].

[4] Adamson v NSW Rugby League Ltd (1981) 27 FCR 535, 554 (Hill J).

[5] Findex Group Limited v McKay [2019] FCA 2129; A restraint must be for the purpose of protecting goodwill as opposed to seeking to prevent competition – See, e.g., Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317, 329 (Gleeson CJ).

[6] Lindner v Murdock’s Garage (1950) 83 CLR 628, 633-634 (Latham CJ). In Del Casale v Artedomus (Aust) Pty Ltd [2007] NSWCA 172, the Court of Appeal noted that ‘an employee’s general know-how, skill and experience’ does not capture the definition of confidential information. It cannot be restrained after termination merely because it was acquired during employment.

[7] Cadgroup Australia Pty Ltd v Snowball [2016] NSWSC 22, [21].

[8] OAMPS Insurance Brokers Ltd v Hanna NSWCA 781.

[9] Pearson v HRX Holdings Pty Ltd FCAFC 111.

[10] Pinnacle Hospital People Pty Ltd v Ramasamy [2007] VSC 433 (Osborn J).

[11] Bond v Rees Corporate Advisory Pty Ltd [2013] VSCA 13 (Maxwell P and Tate JA).

[12] Austra Tanks Pty Ltd v Commissioner of State Revenue [1982] 2 NSWLR 840.

[13] Australian Consumer Law 2010 (Cth) (ACL), s 18.

[14] Maythorn v Palmer (1864) 11 LT 261.

[15] Baker v McAuliffe Holdings Pty Ltd v Carey [2018] FCA 1972, [58].

[16] APT Technology Pty Ltd v Aladesaye (No 2) (2016) 259 IR 335, [147].

[17] Zomojo Pty Ltd v Hurd (No 2) (2012) 299 ALR 621, [395].

[18] Huhtamaki Australia Ltd v Botha [2004] NSWSC 386, [6] (Hamilton J).

[19] (n 17), [385].

[20] Ibid, [377].

[21] Bayley & Assocs Pty Ltd v DBR Australia Pty Ltd [2013] FCA 1341, [223].