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How can a Restraint of Trade Clause affect your business?

Restraint of TradeRestraint of trade clauses are prevalent in all industries throughout Australia and the majority of Australians will be exposed to such clauses at some stage of their working lives.

Through the use of such a clause, a business owner attempts to restrain any person who performs work for their business under a contract (whether an employee by an employment contract or an independent contractor by a contractor’s agreement) from a myriad of activities that may cause loss or damage to the business or its reputation after the ending of the working relationship and to preserve clientele and goodwill. These activities may include (but may not necessarily be limited to) the following, for a specified period:

  1. Working for a competitor;
  2. Approaching or accepting an approach from clients or past clients or customers;
  3. Poaching or recruiting other employees, contractors or staff or diverting them away from the business; or
  4. Retaining or misusing confidential information, to the detriment of the business.

Historically, the Courts have been reluctant to restrain a person if to do so may be unreasonable. Therefore, the party wishing to enforce the restraint bears the onus of proving that it is reasonable[1] and that party must:

  1. Identify a specific risk or protectable interest (such as the risk of loss of customers, staff, goodwill or work to a rival business or the misuse of intellectual property, trade secrets or confidential information);
  2. Prove the clause is not unfairly restrictive or too wide with the restraints it seeks to impose; and
  3. Demonstrate that there is no harm to the public interest.

The factors that are typically considered by the Court include:

  1. What activities are specifically caught by the wording of the restraint;
  2. What the role of the person was and whether they had intimate contact with customers (so as to be able to entice them away) or access trade secrets or confidential information;
  3. The geographical limits of the restraint;
  4. The length of time that the restraint will operate;
  5. Whether there is any standard industry practice that applies;
  6. The relative bargaining power of the parties; and
  7. Other relevant facts or circumstances.

There are no hard or fast rules. Whether a restraint will be upheld, reduced or invalidated depends on the scope and wording of the clause and the facts and circumstances of each case. The following are case examples about how the Courts are prepared to interpret restraints and how wide the results may be:-

  1. Isaac v Dargan Financial Pty Ltd as Trustee[2] – An independent contractor (Isaac) was working as a mortgage broker for Dargan Financial (Dargan) between 2012 and 2016. He managed approximately 25% of the clientele and had access to client lists and sensitive information. After leaving Dargan, Isaac commenced work in a similar capacity with a competitor. He kept and disclosed the client lists and performed works for nine of Dargan’s clients. Dargan sued for breach of the contractor’s agreement (including the non-solicitation and non-interference restraints therein) as well as breach of his equitable duty of confidence. Isaac argued the restraints were unreasonable and that the client lists were available on facebook and no longer confidential. The Court rejected the allegation that all information on the client lists was publically available and found Isaac to be in breach of his restraints. An injunction was granted preventing him from using or disclosing the client lists and he was restrained from working as a broker for several months. He was also ordered to pay damages for his breach of his contractual obligations. Isaac appealed and the injunction was overturned. The Court of Appeal agreed that confidential information had been misused and the non-solicitation restraint was breached. However, the non-interference restraint had not been breached (due to lack of evidence) but Isaac had seemingly not pursued clients, but merely accepted their approaches when contacted.

Author’s Note: What is particularly interesting about this case is the Court was asked to distinguish between Dargan’s legitimate interests and those of Isaac. In an independent contractor relationship, the goodwill and interests of the business owner can be harder to distinguish from those of the contractor’s own business, especially when the contractor is bringing their own clients’ into the business and the contractor is the ‘face’ of the business in the eyes of those clients.

  1. Just Group Ltd v Peck[3] – Ms Peck was employed as Chief Financial Officer for Just Group Ltd (“JGL”) for 5 months before she left for employment with a competitor. Her contract included restraints preventing her from working for a competitor for a minimum of 12 months and a maximum of 24 months. The restraints were in respect of any similar business to that of JGL and 50 specifically named entities, some of which were not competitors of JGL. The Court accepted that Ms Peck was privy to highly sensitive commercial information and JGL had a legitimate interest in the protection of that information. In assessing the reasonableness, the Court observed that the restraint was far too restrictive in that it prevented her employment in the industry in any capacity (even as a cashier or backroom worker). Further, the restraint preventing her from working for 50 named entities was too restrictive in that it would arguably stop her from working for any of them at all, even in a role outside of the fashion industry. Finally the Court found that the cascading restraint between 12 – 24 months was unreasonable given that she only had a 1 month termination period during her 6 month probation. The Court held the restraint was entirely unreasonable and was invalidated. The decision was appealed, however the appeal was unsuccessful.

 

  1. Planet Fitness Pty Ltd v Brooke Dunlop & Ors[4] Ms Dunlop was a personal trainer and an independent contractor with the plaintiff. Her agreement included a three (3) month restraint that prohibited her from directly or indirectly soliciting, canvassing or securing the custom of the plaintiff’s clients when the arrangement ended. Upon leaving, she entered agreements with surrounding gyms offering discounted membership rates to the plaintiff’s clients. She made many offers via facebook and had those clients as friends on her own page. The Court held the plaintiff had a legitimate interest to be protected, however based upon the express wording of the clause, Ms Dunlop was only restrained from soliciting the custom of former clients, but was not restrained from accepting an approach from those clients if she was approached without any initial prompting. The Court only made orders to prevent Ms Dunlop from posting further facebook messages, but did not prevent her from providing services to her former clients.

 

  1. AGA Assistance Australia Pty Ltd v Tokody[5] Ms Tokody worked for the plaintiff for approximately 11 years, most notably as a national sales executive. There was a restraint preventing her from being employed in a similar business which competed with the plaintiff. The restraint was cascading from twelve months, to six months and then to three months. Ms Tokody was a high level employee reporting directly to the CEO in a sales and client relationship manager type capacity. She was the face of the plaintiff with many clients and key in the plaintiff cultivating and maintaining those relationships. She negotiated high end contractual terms for contracts lasting up to 3 years for sporting events and other occasions. The Court held that her role was such that if she left the plaintiff’s employ, many of the plaintiff’s clients would be more than likely to follow her as the only person with whom they had dealings for the plaintiff. The Court found the plaintiff had a legitimate interest that warranted a restraint for a limited time because the connection between Ms Tokody and the clients were so personal, it would take any replacement time to build up the same goodwill. A restraint of 12 months was reasonable and an injunction was granted to the plaintiff to protect it from Ms Tokody’s use of information about key clients while working for a competitor.

Any business owner who seeks to impose a restraint on an employee or an independent contractor must take care to ensure the restraint specifically sets out the conduct with is to be restrained or prohibited and the duration. The restraint must only go as far as is reasonably necessary having regard to all of the circumstances, or it is liable to being defeated.

From an employee’s or independent contractor’s perspective, if you have received a letter of demand alleging a breach of some form of restraint, it is imperative that legal advice be sought at the earliest possible time to determine whether the restraint alleged is reasonable or liable to being challenged, having regard to the express wording of the clause and all of the circumstances of the case.

Marino Law has extensive experience in acting for employers, employees and contractors including as to the drawing of employment or contractor / consultancy agreements and also commercial disputes, including the operation of any contractual restraints. For specialist advice that is tailored to suit your specific circumstances, please contact one of our experienced commercial lawyers today.

[1] See for example, Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 and Buckley v Tutty (1971) 125 CLR 353 at 380.

[2] [2018] NSWCA 163

[3] [2016] VSC 614

[4] [2012] NSWSC 1425

[5] [2012] QSC 176

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