A recent New South Wales Court of Appeal decision upheld the validity of a restraint clause that prevented two executives from soliciting clients or competing with their former employer's business for 12 months. Despite this decision, the enforceability of restraints are still dependent on the facts of each case with the courts paying careful consideration to:
- the level of the employee in the organisation;
- the employee's knowledge of confidential information;
- the damage that could be caused by the employee moving across to a competitor; and
- the wording of the clause itself.
In the long running Ice TV case, two senior executives of Ice TV Pty Ltd (Ice TV) had their employment terminated on three months' notice in accordance with the contract after the proposed float of the company collapsed. Ice TV distributed an electronic program guide to television known as the Ice Guide. The Ice Guide could be downloaded onto personal video recorders, set top boxes and similar equipment.
After their employment was terminated the two executives, through their consulting firm, undertook consulting work on behalf of Mobilesoft Pty Ltd, a software engineering company, which was a customer or potential customer of Ice TV. As a result of their actions, Ice TV commenced proceedings and obtained an interlocutory injunction in May 2007 that prevented them for three months from competing with Ice TV, divulging confidential information or canvassing or soliciting the custom of any named client. However, in September 2007 the injunction was discharged because the Court concluded that the undertaking a plaintiff gives that it will pay costs if ultimately the injunction was found not to be warranted could now not be met because of the parlous financial state of Ice TV.
There was a final hearing as to whether there had been a breach of the contract and whether damages were therefore payable, and judgment for Ice TV in the amount of $35,000 plus $8,488 in interest plus costs, was ordered against the two former executives.
The New South Wales Court of Appeal considered an appeal where the two executive appellants represented themselves. The restraint provisions that were at issue stated that the executives:
Must not, during their employment or for a period of 12 months thereafter or such lesser period as judged by a court as being reasonable to protect the Company's goodwill and confidential information:
- carry out or be engaged or involved in any business similar to or competitive with the business of the Company carried on in the 12 months prior to the termination of employment; nor
- canvass or solicit the custom of any person who had entered discussions or negotiations with the Company during the 12 months prior to the termination of the employment with a view to becoming a customer; nor
- divulge confidential information including performance reports, operation reports, profitability forecasts, business plans or normal financial information that may be of commercial value to a competitor.
In other words, these clauses if upheld, prevented the former executives for 12 months after the employment ended from competing with their employer or seeking to perform work for its customers.
Restraints of trade (such as these clauses) are contrary to public policy and void unless they can be justified. The onus is on the party seeking to enforce the restraint, ie the employer, to establish that the restraint is no more than is reasonably necessary to protect the reasonable interests of that party. A court generally takes a stricter and less favourable view of restraints of trade entered into between employers and employees than in other commercial arrangements; in other words it makes it harder for an employer to enforce a restraint.
The Court of Appeal held that the non-solicitation clause was valid.
In the courts view, Ice TV had a legitimate interest in preventing its most senior executives, once their employment had ended, from canvassing or soliciting any clients or potential clients of Ice TV. It also considered that Ice TV had legitimate interests in protecting through the restraint the two former executives from using the contacts and knowledge of Ice TV's business to compete with that business. It noted that the particular restraints prevented the two former executives from carrying on or otherwise being engaged or involved in any business "similar to or competitive with the business of Ice TV." However, it accepted the primary Judge's conclusion that the term 'similar to' may be too wide but could be read down so that the paragraph was confined to involvement by the two former executives in a business 'competitive' with that of Ice TV. This clause was then held to be valid.
The Court of Appeal noted that the two "were senior executives in a very small enterprise who between them had significant control over the course and direction of the business and who were involved in high level negotiations with potential customers... They also had knowledge of matters relevant to pricing and technology... and had developed relations ... [with those key customers]."
It is to be noted that whilst the executives were key components of Ice TV's business, in terms of bargaining the employees had to give 12 months to end their employment, whereas Ice TV only had to give three months notice. However, this did not play a part or appear to play a part in the Court's ultimate decision.
What this case means for employers
Does it follow that an employer can prevent its senior staff from competing with it for a period of 12 months after the employment ends and also from not soliciting its customers for the same 12 month period?
The answer is that the courts will make decisions on a case by case basis. This is confirmed by an earlier case in the Supreme Court of New South Wales where an injunction was granted to prevent an employee with one business publisher from working with a competitor (although it limited the type of publications she could work on) on the basis that it would cause very substantial hardship and result in her being effectively unemployed.
In other words, the circumstances of each case must be carefully considered - especially the level of the employee in the organisation, his or her knowledge of confidential information, the damage that could be caused by the employee moved across to a competitor, and the wording of the clause itself.
In New South Wales there is the Restraint of Trade Act 1976 that enables a court to more readily 'read down' a restraint provision of a contract. However, the principles about restraints are otherwise the same.
If an employer is going to rely on a restraint clause it must be absolutely careful in the way the clause is drafted at the time the contract is entered, and must carefully consider the particular circumstances of the individual and his or her role and responsibilities each time it provides a contract to a successful applicant.
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