The Court's decision
The Supreme Court of New South Wales has recently upheld a restraint of trade for Red Bull Australia Pty Limited (Red Bull) restricting its former general manager and its marketing director from working competitively for Calidris Australia.
This outcome was achieved even though following the termination of employment, senior executives entered Deeds of Release which overtook restraint obligations in the contracts of employment. Further, the senior executives were prepared to give undertakings to the Court not to work in the competitive energy drink sector.
In spite of these features, the Court was prepared to give full effect to the restraining order which not only prevents the senior executives from working competitively until 30 November 2011 (when the contractual restraints ended) or pending the outcome of final hearing, it also quashes their ability to act as directors of the entity for which they took up employment. This is because the Judge said they were "in control of the company here (and they) owe Calidris Australia an obligation to advance its interests".
The Court found these facts "puts them in conflict with their obligations under the restraint clauses in their employment contracts".
The restraint clause
The non-competitive restraints are essentially for a period of 12 months ending 30November 2011 and accordingly, as at the date of the interim hearing (23 September 2011) only had about two months to run.
The employment contracts between Red Bull and the senior executives contained a reasonably standard clause which contained a term "that they would not directly or indirectly engage on or be engaged in or involved in any business in competition with or of a similar nature to the business being carried on by (Red Bull) including but not limited to any business concern with the development, sale, supply, manufacture or research relating to alcoholic or non-alcoholic beverages either containing taurine, caffeine or guarana, or beverages which are marketed as energy drinks...".
The market was the energy drink market, although the evidence suggests that the new employer is also engaged in other markets in which the senior executives could (and undertook to) work to the exclusion of the energy drink markets.
Balance of convenience
In granting or refusing an injunction, the Court is obliged to have regard to the balance of convenience. Put colloquially, is it more convenient to restrain the defendants from working by giving the injunction? Alternatively, is it more convenient not to restrain the executives and allow the plaintiff (Red Bull) to recover money damages if it establishes an enforceable injunction, the breach of which has caused it loss and damage?
In this case, the Court determined the balance of convenience favoured the injunction because:
- Red Bull is, on the face of it, entitled to enforce its restraint
- senior executives are the only directors of Calidris Australia and obliged to act in its interests (including under the Corporations Law)
- the Court is entitled to assume in an interim hearing that the restraints are valid and enforceable
- the clear evidence is that Calidris Australia has "as its business and probably its core business, the marketing of an energy drink"
- although the Calidris energy drink is "in a slightly different format" it still constitutes "a venture with which the (executives) have promised (Red Bull) that they would not be involved".
Of significance to the Court is Red Bull's undertaking as to damage. If it proves on final hearing that either the restraints are unenforceable or the damages would have been an adequate remedy for Red Bull then the damages to the senior executives will be limited to lost income and lost opportunity for a period 23 September to 30 November 2011.
Final hearing will determine whether or not the intervening Deed of Release (which noted the continuing obligations of the senior executives with respect to confidential information but was silent on the restraints of trade in the contracts of employment) will be sufficient to oust the restraints of trade as they appear in the contracts of employment.
- Several recent cases, including this one, remind us that superior courts will enforce contractual restraints of trade even those which seem to be onerous.
- The injunction granted in this case had sidelined Calidris' corporate plans to introduce a competitive energy drink until at least the final hearing of these proceedings.
- Red Bull (even if it does not prevail at final hearing) may well reap the benefit of these restraint of trade clauses by effectively disrupting the entry into the market of a competitor.
- The price to be paid by Red Bull even if it does not succeed in final hearing, is limited when compared to the commercial advantage it might secure. On the other hand, if Red Bell prevails it will not pay damages and it will have also interrupted its competition in a way that assists in protection of its business.
- Employees, and in particular senior employees, should presume that contractually agreed restraints of trade are enforceable and will be enforced, including by summary proceedings.
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