Enforcing restraints of trade: Tips for employers

In a judgment handed down last week, the Federal Court of Australia highlighted a number of practical tips for employers to consider when enforcing restraints of trade. It is important for employers to keep these ‘tips’ in mind for any employee ‘exit’ process.

Restraint of trade clauses are a key way in which employers can protect their business when an employee leaves. Restraints of trade can be express provisions in an employment contract or in other related agreements. They can also include other types of clauses such as confidentiality clauses. Each operates as a restraint of trade as they restrict the future ‘trade’ of the employee and are subject to the restraints of trade law in each state or territory.

A useful reminder

The decision in Avant Group Pty Ltd v Kiddle [2023] FCA 685 (23 June 2023) provides a useful reminder of the key principles that apply when an employer is both establishing restraints of trade in their employment contracts and when seeking to enforce them.

The law concerning the operation of restraints of trade is well-established and can be summarised as follows:

• a restraint of trade is against public policy and therefore unenforceable unless it is shown to be reasonable in respect of what it is seeking to protect, which must be a legitimate business interest
• the restraint of trade clause must be reasonable, in the sense that it goes no further than reasonably necessary to protect the particular business interests.

These questions are assessed when the relevant contract is entered into.

The circumstances

In this case, an employee of a small specialised consulting business whose role focused on assisting clients with government grants had their employment terminated. Their employment contract had express restraints of trade. The applicable restraint of trade clause was a ‘cascading’ clause and provided for operative restraint periods ranging from three to eighteen months following the end of the employment.

After a period of six months following the termination of their employment, the former employee sought to reengage with former clients, including by means of solicitation.

The claims

As the case reached court, Avant sought an injunction to stop the former employee from engaging in activity that breached the restraint of trade provisions in the employment contract. As part of its decision, the court made a number of observations regarding the enforcement of restraints of trade which are relevant for all employers to note. These points are as follows:

• the law in New South Wales is slightly different to other jurisdictions in that the Restraints of Trade Acts 1976 (NSW) operates and can ameliorate the effect of any ‘unreasonable restraint’ through it being read down to the extent that it is reasonable and therefore enforceable, having regard to the principles outlined above. That means that if an employment contract specifies the law of another state, an employer cannot use the Act to ‘save’ the clause even if the relevant employment and the alleged conduct occurs in New South Wales
• if an employer wishes to enforce the restraints of trade in the employment contract, they need to avoid any conduct that may be ‘repudiatory’ in nature. This is conduct that evidences an intention to no longer follow the terms of the contract. The reason is that if there is repudiatory conduct by the employer which the employee then accepts, the contract is not enforceable by either party going forward. Relevantly, that means that the restraint of trade provision itself is most likely not enforceable
• in this case, the question was whether the failure to pay the correct amount in lieu of notice was repudiatory conduct. The court held that it was not because Avant intended to comply with the contract and the minimum notice provisions under the Fair Work Act 2009 (Cth) but made a mistake about how to calculate the years of service. Generally actions such as withdrawing the use of a laptop and/or mobile phone, refusing to pay a bonus, withdrawing work and even placing an employee on garden leave when there is no contractual right to do so can be circumstances in which a repudiation can occur. This is an important point for employers to be aware of.

If an employer is seeking an injunction to stop a former employee from engaging in prohibited activity under an agreement, until the court can make a final determination, the former employer must approach the court with ‘clean hands’. 

In this case, the former employee argued that the same failure to properly pay in lieu of notice was an act of ‘unclean hands’. The same could apply to any underpayment of an entitlement, whether it be superannuation, annual leave, long service leave or redundancy pay. The court highlighted that the doctrine of ‘unclean hands’ essentially means that a plaintiff should not be permitted to derive an advantage from their own wrongdoing. In this case, the failure to make the requisite payment in lieu of notice did not have the necessary connection to the breach of the restraint of trade provision that the former employer was seeking to enforce.

Practical outcomes

This decision highlights the importance of employers being very clear on the business interests they seek to protect, the nature of those interests and when and how those interests arise so that the language of their restraints of trade matches those circumstances. This allows the scope and the extent of the protection provided by the relevant clauses to go no further than necessary to protect the interest identified.

This case also reminds employers of the need to cautiously approach any forced ‘exit’ from their business in a context where it is important for the business to maintain the protections in a restraint of trade clause. How they conduct themselves on exit will influence whether certain requirements at the point of enforcement have been met. It is always important to keep the end in mind.

If you have any questions regarding this article, please get in touch with a member of our team below.

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Stephen Trew

Michael Hope

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