Employment Law - Contracts - Restraint of trade clauses
Date: January 24, 2012
Authors: Patrick Mulligan B.A., LL.B.
The purpose of this article is to analyse a recent decision of the Supreme court. It is a novel decision in so far as the court ruled on a peculiar set of facts and provided some guidance on how the courts will rule on restraint of trade clauses in the employment context that refer to corporate groups and whether that aspect of drafting may be too wide and therefore unenforceable in the circumstances.
Facts:
Mr. Whelan(W) worked in the waste management industry since 1984. He managed a waste management site at Tullamarine. The management and ownership of this site changed hands and he maintained employment throughout change of ownership. Till 2/7/8 he was employed with the plaintiff (TPI). On 28/7/8 he commenced employment with Hi Quality Sales Victoria p/l( HQV) that also managed a site in the waste management industry. W was unhappy with his employment predicament at TPI. He was initially considered for a national role in his field. However, the Tullamarine site that he was in charge of became the subject of proceedings by the EPA due to overfilling of waste on the site. Despite several emails by W requesting a final determination on their consideration for the promotion, his duties were refined to the Tullamarine site. It was also argued by TPI that the EPA proceedings reflected badly on his performance and that they gave rise to the summary dismissal. Notwithstanding that TPI and W offered him a severance payment of 6 months pay in exchange for his resignation. As part of this, W signed a separation deed. In that deed there was a restraint of trade clause preventing his from soliciting and competing in the same industry or that of its subsidiaries.
TPI commenced proceedings for an urgent injunction restraining his employment with HQV pursuant to the restraint clause. In support TPI also argued that W engaged in conduct that risks improperly disclosing confidential information.
Held: Four arguments were advanced in w’s defence at court.
W argued that the restraint clause was too wide to be enforceable. A major aspect of the clause and the deed was that W could not for 6 months undertake, carry on or be engaged in or concerned with or interested in any business which is directly or indirectly competitive with the current employer’s(and its Related Corporates’)business. The agreement went on to define related body corporate as in s50 of the Corporations Law. In response the court assessed the claim. It noted that under common law all restraint are unlawful and invalid and that the onus is on the employer in proceedings to establish that the restraint is reasonable in all the circumstances. In the employment context, a restraint is reasonable where it can be shown that the clause does not exceed what is necessary to protect its legitimate business interests(i.e. confidentiality, protection of goodwill and solicitation of clients).
The court accepted evidence that the website of the bodies corporate revealed it engaged in business in more than W’s profession, that being landfill, including transport, manufacturing, facilities management etc.
The court also accepted evidence that a previous employee worked for HQV and that the landfill site that W was engaged to work in by the new employer involved a class of waste management/landfill that TPI did not cater for.
The court held that in light of the inclusion of the related body corporate in the restraint clause, and the fact that same imposes a restraint in relation to businesses that W has no connection with, and that W has never been employed means that that the ambit of the employee’s activities is narrower than the ambit of the restraint. In other wides the restraint was too wide and therefore invalid.
Furthermore confidentiality arguments failed. Although it was conceded by W in cross examination that he disclosed confidential information, there was insufficient evidence advanced and pleaded by the plaintiff of what was labelled confidential and not within the general knowledge and skill set of W, or for that matter what were the potential inherent dangers of exposing information alleged to be confidential.
Observations:
For Employers: This case could have had a different outcome if the deed was drafted more narrowly and did not include all corporate entities that did not engage in landfill related business. All cases and injunctions however will turn on the case pleaded, evidence and the contract or deed. All the more reason for seeking legal advice by experts in the field prior to terminating an employee’s employment or negotiating resignation and separation deeds for same.
For employees: the moral of the story is that it is up to the employer to establish that the restraint is reasonable in order to protect its legitimate interests. Notwithstanding that, it is often the case that they will try and draft restraint clauses in such a broad manner that they are excessive and therefore void.
Disclaimer:The contents of this article may need be relied on for legal advice of related purposes in any manner whatsoever. In the event that you require advice on restraint clauses or employment law issues make an appointment with the author to assess the merits of your case and provide legal advice.
