10/7/2015 Restraintoftradeareyoubeingreasonable?

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Restraint of trade are you being reasonable?

Australia October 30 2012

RestraintofTradeClauses

Havingawellconstructedrestraintoftradeclauseinanemploymentcontractisextremelyimportanttoprotectthe
legitimateinterestsofanemployerandtheirbusiness.

Arestraintoftradeclauseiswhenoneparty,thecovenantor,givesupafreedomthatheorshewouldotherwiseenjoyin
relationtohisorhertrade,forthebenefitoftheotherparty,thecovenantee.

Restraintoftradeclausesareusedasameanstopreventdepartingemployeestakingclients,confidentialinformation/trade
secretsandcompetingwiththebusinessforacertainperiodandwithinacertaingeographicareaafterleaving.

Atfirstinstance,restraintoftradeclausesarevoid.1However,arestraintoftradewillbevalidifitcanbeshownthatitis
reasonable.IfaCourtfindsarestraintoftradeclausetobeunreasonable,itwillmostlikelyresultinthewholeclausebeing
unenforceable.

CascadingclausesareusedasameanstoprovideanumberofalternativesintheeventthattheCourtfindsaterm
unreasonable.Unreasonabletermsintheseclausesareabletobesevered,allowingtheremainderoftheclausetobe
enforceable.

Thefollowingcaseshighlighttheimportanceofawellconstructedrestraintoftradeclause,andhowastandardclausemay
notbeappropriateforallemployersandemployees.

HRXHoldingsPtyLtdvPearson[2012]FCAFC111

Inthiscase,theFederalCourtofAustraliaheldthatatwo(2)yearrestraintoftradeclausewasreasonable.

HRXHoldingsPtyLtd(HRX)wasahumanresourcescompanyandwascofoundedbyMrPearson.MrPearsonwasthe
DirectorofHRXuntilheresignedin2011.TheclauseinMrPearsonsExecutiveServiceAgreement(ESA)restrainedhim
fromacceptingemploymentwith,orengaginginabusinesssimilartoorcompetitivewithHRXforaperiodoftwo(2)
yearsaftertheterminationofemployment.

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TherestraintclausesetoutinMrPearsonsESAwasnegotiatedbyMrPearsonandMsLeslie,thenonexecutivechairandco
founderofHRX.ThisrestraintsetoutanumberofrequirementsandprovidedremunerationforMrPearsonduringthis
period.BothMrPearsonandMsLeslieagreedthattheiremployeesshouldbesubjecttoarestraintoftradeforeitherthree(3),
six(6)ortwelve(12)monthsdependingonthenatureoftheiremployment.ItshouldbenotedthatMrPearsonsperiodof
restraintwastheonlyonewhichprovidedremuneration.

MrPearsongavetwo(2)monthswrittennoticeofhisresignationandproposedtoworkatanothercompany(Talent2)asone
oftheirmostseniorexecutives,indirectcompetitionwithHRX.ThedecisionbyMrPearsontoworkforTalent2ledtoHRX
seekinganinjunctionintheFederalCourtrestrainingMrPearsonfromdoingso.

Attrial,theprimaryjudgeconsideredanumberofmattersincludingtheconstructionoftheclauseandthereasonablenessof
therestraint.Theprimaryjudgefoundthattherestraintclausewasreasonableonthebasis:

Therewasconsiderablenegotiationabouttherestraint

MrPearsonwasprovidedwithsignificantremunerationduringtherestraintperiod

Thetimeperiodoftwo(2)yearswasappropriateinthecontextofthecontractualcycleHRXoperated
on

MrPearsonwasusuallytheprimarypresentertoprospectiveclients

MrPearsonsroleinHRXallowedhimaccesstoconfidentialinformationincludingtechniquesand
resourcesthatwereusedtogainandretainclientsand

MrPearsonhadtheopportunitytoseeklegaladviceontherestraint(precommitment),whichhedid.

OAMPSInsuranceBrokersPtyLtdvHanna[2010]NSWSC781

Thiscasedemonstrateshowanemployersuccessfullyrestrainedanemployeebyutilisingcascadingclauses.

MrHannawasemployedatOAMPSInsuranceBrokersPtyLtd(OAMPS)asaninsurancebrokerfromOctober1990May
2010.HeresignedatOAMPSandcommencedworkatacompetitor,StrathearnInsuranceBrokers(Strathearn).

AtthetimeMrHannaresigned,hispositionatOAMPSwasclientdirector.OAMPSsoldinsurancepoliciestoclients
earningrevenuethroughcommissiongainedonsales.

MrHannawasawareoftherestraintprovisioninhisemploymentcontractandadvisedStrathearnthathecouldnotbring
clientswithhimfromOAMPSwhenhecommencedworkatStrathearn.However,MrHannatoldhisclientsiftheywanted
himtodosohecouldlookafterthemandtoldthemhewascommencingworkatStrathearn.

TheCourtheldthatanemployerscustomerrelationshipisaninterestthatcansupportarestraintoftradeiftheemployeeis
thefaceofthebusinessandhassignificantpersonalknowledgeorinfluenceovertheclient.

TherestraintsetoutinMrHannasemploymentcontractprovidedthathewouldnotcanvass,solicitordealwithanyclients
ofOAMPSthathehaddealingswithduringthetwo(2)yearperiodpriortohisemploymentending.

Cascadingclauseswereusedtodefinetherestraintperiodandrestraintarea.Setoutbelowisthecascadingclausethe
OAMPSusedtodefinerestraintarea.

RestraintAreameans:

a. Australia

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b. TheStateorTerritoryinwhichyouareemployedatthedateofterminationofyouremployment

c. Themetropolitanareaofthecapitalcityinwhichyouareemployedatthedateofterminationofyour
employment.

Therestraintperiodwasamaximumperiodoffifteen(15)monthsandaminimumoftwelve(12)months.

MrHannaarguedthattheclausewasvoidbecauseitwasnotreasonableinprotectingtheinterestsofOAMPSandthatitwas
uncertain.However,theCourtfoundittobecertaindespitetherebeingnine(9)differentrestraintoptionseachrestraintwas
separateandindependentandwascapableofbeingsevered.

TheCourtfoundthatarestraintoftwelve(12)monthswasreasonable.Thiswasheldtobeareasonabletimeasthelengthof
OAMPSinsurancepolicieswastwelve(12)months.ThisallowedreasonabletimeforOAMPStorenewitclientsinsurance
policieswithoutMrHannacompetingforthisworkathisnewemployment.

Conclusion

Itisimportantthatconsiderationistakenwhendeterminingarestraintoftradeclauseinanemployeescontract.Employers
needtorememberthattheseclauseswillonlybeenforcedwheretherestraintprovisionisreasonableinprotectingthe
legitimateinterestoftheemployer.

Courtswilldeterminereasonablenessbylookingatanemployeesseniority,remuneration,accesstoconfidential
information/tradesecretsandnature,scopeandextentoftheemployeesdealingwiththebusinessclientele.

McInnes Wilson Lawyers - Lisa Oldham and Lucy Fennelly

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