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  • Employment Contracts and Restraint of Trade Clauses

Employment Contracts and Restraint of Trade Clauses

Date: April 22, 2007

Authors: LAC Lawyers

This paper explores restraint of trade and confidentiality agreements between employers and employees. It is common for employers to have a global restraint clause to restrain departing employees from working for a competitor however that may not be sufficient. The underlying principle is that for a restraint clause to be enforceable it must be reasonable.

Remedies available to an Employer

The remedies available to an employer are:

  1. Obtain an injunction as soon as possible; and/or
  2. Claim for damages.

Delay in obtaining an injunction may result in an unsuccessful application. Time is of the essence in an application for an injunction.

Injunctions for a breach of a restraint clause may be granted if the employer can show that it has a legal right that has been infringed, that the breach of that right cannot be adequately compensated by an award of damages and that the balance of convenience favours the granting of an injunction. Some of the questions that will require urgent consideration before applying for interlocutory relief against an ex employee are:

  • Is there an express contractual provision which purports to limit what the ex- employee can do?
  • Has the former employee taken any items of property which belongs to the old business? For example, is he or she in possession of client lists, customer profiles, or other information in written form? 
  • Is the employee intending to engage in soliciting former customers?  How is he or she intending to do so?

In considering post employment restraint it is necessary to distinguish between two situations:

  1. Where the employee entered into an express covenant to limit the work which he or she may do after employment has ceased.
  2. In the absence of express contractual provision, where the employer is only entitled to rely on the general law.

Restraining Competition

The onus of proving that a restriction is reasonable is on the person seeking to enforce the covenant; the validity of the covenant is to be judged as to the date of the agreement imposing it.  Daly Smith Corp (Aust) Pty Ltd v Cray Personnel Pty Ltd.

If the restraint is void at common law, it may be saved by an application of the Restraint of Trade Act 1974.

Restraint of Confidential Information

Only certain classes of confidential information are protected including information which:

  • Know-how which may have been confidential originally but which has become part of the employee's skill and knowledge; or
  • Specific trade secrets so confidential that even though they may necessarily have been learned by heart, and even though the employee may have left the service, they cannot be used for anyone's benefit but the employer.
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In  N E Perry PL v Judge [2002] Doyle CJ said:

The nature of the interest that NEP was entitled to protect was conveniently identified by Latham CJ in Lindner v Murdock's Garage (1950) . Although Latham CJ was in dissent, what his Honour said correctly states the position. He said:

"Where an employee is in a position which brings him into close and personal contact with the customers of a business in such a way that he may establish personal relations with them of such a character that if he leaves his employment he may be able to take away from his former employer some of his customers and thereby substantially affect the proprietary interest of that employer in the goodwill of his business, a covenant preventing him from accepting employment in a position in which he would be able to use to his own advantage and to the disadvantage of his former employer the knowledge of and intimacy with the customers which he obtained in the course of his employment should, in the absence of some other element which makes it invalid, be held to be valid. Reference has already been made to the right of an employer to protect his 'trade connection' - a right recognised in cases in which covenants were held to be invalid because they went beyond what was reasonably necessary to protect such a connection."

The issue for the Judge was whether the restraint on competition, in the form of a covenant not to practise within Whyalla, was an unreasonable restraint of trade and unenforceable.

As Gibbs J said in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973):

"The requirement that the restriction be reasonable in the interests of the parties has been explained as meaning that the restraint 'must afford no more than adequate protection to the party in whose favour it is imposed' Herbert Morris Ltd. v. Saxelby. In other words, 'does the restriction exceed what is reasonably necessary for the protection of the covenantee?' (McEllistrim v. Ballymacelligott Co-operative Agricultural and Dairy Society Ltd. [1919]."

Gibbs J went on to make two further points that are relevant. He said:

"Nevertheless the fundamental rule remains that the restraint must be reasonable in the interests of the contracting parties, and it would not be in the interest of a covenantor to subject himself to any restraint unless he received some advantage by so doing. In my opinion it is permissible, in asking whether a restraint is reasonable in the interests of the parties, to consider, as part of the circumstances of the case against which the question of reasonableness is to be decided, the quantum of consideration received by the covenantor and the effect of the agreement on the position of the covenantor."

Analogous to the rule that the court is not entitled to concern itself with the adequacy of the consideration is the further principle that has been restated in the authorities, that where the parties to a contract have been in a position to bargain on an equal footing they should be treated as the best judges of what is reasonable in their own interests:

The fact that the parties have bargained from a position of equality is therefore one of the circumstances to be considered in determining whether the covenants were reasonable, but it does not save from invalidity a covenant found to be unreasonable or contrary to the public interest.

Customer lists may well constitute confidential information which the employer is entitled to protect. In assessing confidentiality, much may depend on the circumstances in which the lists were compiled and how they were subsequently protected.

Information Acquired in the Course of Employment

The position with respect to the use of information acquired by an employee in the course of his employment has been considered in detail in Forkserve Pty Ltd v Jack and Aussie Forklift Repairs (2000)  by Santow J:

"(a) an employee may not solicit customers for a future time when the employment has ceased and the employee or director has established his or her own business;
(b) once employment has ceased , in the absence of special stipulation, the employee may canvass the customers of the late employer and may send a circular to every customer".

In Digital Pulse Pty Ltd v Christopher Harris & ors [2002] two employees had  restraint clauses in their contracts which had an express term not to compete with Digital during their employment. Contrary to the terms of the contract of employment the two employees diverted business to an entity of their own. The Court found in favour of Digital and awarded damages against the ex-employees.

In determining the information that is confidential the court generally has regard to the following, among others:

  1. Whether the party expressly informed the other, orally or in writing of any information that is confidential.  The information must be identified with specificity and not merely in global terms, that which is said to be information in question to be confidential;
  2. Show that information has a necessary quality of confidentiality;
  3. Show that information was received by the other from the Plaintiff in such circumstances as to import an obligation of confidence;

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