Restraint of Trade

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  • Post-Employment Restraints

    In industries where employees are exposed to commercial secrets, it is very common for employment contracts to contain a clause which purports to stop the employee from working in competition after they leave.

    These clauses are often referred to as a restraint of trade or post-employment restraint.

    An example of this sort of clause might be: The employee agrees that for a period of 12 months from the cessation of employment they will not work for any competing business in the same industry within a 10 kilometre radius, and they will not approach other employees of the employer to join them in any such enterprise for the same period.

    Atkinson Vinden has acted in many court disputes relating to the enforceability of these clauses, and we regularly assist employees and companies to interpret, negotiate and litigate these issues.

  • Are restraints of trade enforceable?

    The answer is that it depends. The court will look at the individual circumstances, and determine whether in all of those circumstances the restraint clause is reasonable or not. If it is, then the restraint (or a modified version of it) will be enforced, but if not, then it will be ignored.

  • What are the relevant factors to consider?

    The main issues a court will consider when deciding whether or not to enforce a clause of this kind are:

    • whether the clause is necessary to protect a legitimate business interest of the employer, or whether instead it unreasonably seeks to prevent free competition.
    • whether the scope of the restraint is sensibly reflective of the operations of the business, for example whether the geographical area is too broad, or whether the time frame is reasonable or not.
    • whether the practical effect of the clause would be to prevent the employee from providing for their family, ie whether the burden of the restraint is unreasonably carried by the employee
    • whether there was consideration (payment) for the restraint (particularly relevant in circumstances where the restraint was imposed after the employee was already working with the company).
  • What would a reasonable restraint clause look like?

    The most sensible restraint clauses identify the activities that directly relate to the work that employee did during their employment. For example, a restraint that said that the employee was not to make contact with, or accept instructions from a client of the employer for whom that employee specifically did work or had a business relationship for a period of 12 months, would likely be considered reasonable.

  • What is the court process for sorting out these disputes?

    The old employer will file an injunction application, usually with the Supreme Court, seeking an urgent order stopping the worker from working with the new employer. The court will need to be shown clear prima facie evidence that there is an enforceable restraint of trade clause, and that the circumstances are such that the clause would be breached by allowing the employment to continue. The old employer must give to the court an undertaking as to damages. If an urgent injunction is granted, then the court will usually order this only on an interim (short term) basis. The court might, for example, grant an interim injunction for 4 weeks, during which time the parties are to serve more detailed evidence, before a second and more comprehensive court hearing.

    At the second hearing, final orders will be made, which may range from either setting aside the injunction and ordering compensation to the employee on the basis that it was held that the restraint clause should never have been enforced, through to an order confirming the restraint. There will also be costs orders. These costs orders can be very significant, especially if a number of days at court were involved.

  • How do these disputes generally get resolved?

    Whether we are acting for the employer or the worker, we always focus on whether a compromise settlement is possible. Can the employee provide an undertaking not to do certain things that are sufficient to protect against the risks that the old employer is worried about? If the worker makes a reasonable offer of compromise, but the old employer continues with the case, the old employer is at risk of a costs order against them. The reality is that courts are generally sympathetic to workers, especially where the worker was basically compelled to sign the agreement or not get the job in the first place.

    However, sometimes the commercial stakes are too high for the old employer. The old employee may have possession of highly sensitive commercial information such as business plans or marketing strategies that need to be quarantined. In those cases, there may be a proper basis to fight the matter all the way, and to try to shut down the risk.

  • How to get help

    If you call us about this sort of situation, we will act quickly, because time is of the essence in these disputes. We will immediately contact the other party to try to negotiate an outcome that prevents the issue escalating to court. If court action is needed, we know the process well and have a panel of experienced barristers available to take urgent action to protect your interests. Call our team today on (02) 9411 4466 for urgent expert advice and representation.