The Federal Court recently hit what may be a high point for a
restraint of trade clause, declaring a two year restraint
enforceable against a company's co-founder.
In HRX Holdings Pty Ltd v Pearson  FCA 161 the Court
refused to strike out or read-down a two year restraint, and
prevented HRX co-founder Brent Pearson from accepting a job with
industry rival Talent2 until November 2013.
The case involved HRX Holdings Pty Ltd (HRX), a human resources
outsourcing company, which was co-founded in 2005 by Mr Brent
Pearson and Ms Katrina Leslie. The business was initially built
around the abilities and persona of Mr Pearson, whom the court
described as having "quirky brilliance", and whose
ability to attract clients was likened to "sprinkling fairy
As Mr Pearson was to play a pivotal role in the business, the
issue of his employment contract, and particularly his restraint of
trade clause, was the subject of considerable negotiation with his
co-founder, Ms Katrina Leslie.
Mr Pearson immediately accepted that a restraint of trade clause
was reasonable, and quickly reached agreement with HRX over the
extent of activities that the clause should cover. But the parties
had difficulty agreeing on the length of the clause. Initially, Mr
Pearson suggested that the clause should only last for six
Eventually, Mr Pearson agreed to a two year restraint in
exchange for an eight percent shareholding in HRX. Additionally,
HRX agreed that if it enforced the restraint, it would pay Mr
Pearson, for all but the first three months of the restraint
period, his average remuneration over the preceding two-year
period, reduced by any alternative income Mr Pearson received over
the period. Mr Pearson agreed to the proposal despite having legal
advice that a two year restraint would be unenforceable.
Mr Pearson resigned as a director of HRX in July 2011, and in
September 2011 he resigned his employment entirely to join a
competitor, Talent2. HRX sought an injunction from the Federal
Court to enforce Mr Pearson's restraint of trade clause and
prevent him from taking up the new position.
Decision by the Federal Court
Mr Pearson raised a number of arguments as to why the restraint
was unenforceable. These ranged from technical interpretations of
the restraint to arguing that the Restraints of Trade Act 1976
(NSW) (Restraints Act) was made inoperable by the Fair Work Act
2009 (Cth) (FW Act).
Buchanan J dismissed all of Mr Pearson's arguments, and
in particular, refused to read down the two restraint clause,
finding that it was reasonable to restrain Mr Pearson for the
entire two year period. In his decision, Buchanan J emphasised the
the restraint was separately negotiated and accompanied by
specific payments for the period of the restraint
at the time that Mr Pearson entered into his employment
contract, he was the only executive in HRX who had such a payment
Mr Pearson had received an eight percent shareholding in
exchange for the restraint
the two year restraint coincided with the average length of
HRX's client contracts, meaning that HRX would have an
opportunity to renew nearly all of its existing contracts without
facing competition from Mr Pearson
Mr Pearson was obviously central to HRX's business, and
intimately familiar with all of its confidential information
including its pricing structures, clients and when its client
contracts would come up for review.
The Court also found, unsurprisingly, that the FW Act did not
make the Restraints Act inoperable. Buchanan J held that under s 27
of the FW Act, the exclusion of state industrial laws did not apply
to laws that dealt with "non-excluded" matters, which
included "claims for enforcement of contracts of
employment". It was noted also that the Restraints Act is not
an industrial law in any event.
Implications for employers
A two year restraint is without question, a very long restraint,
and not one that would ordinarily be considered enforceable.
However, this case demonstrates that even an unusually long
restraint can be enforceable if it has been individually tailored
to both the business and the individual employee.
The case demonstrates that, when tailoring a restraint clause,
businesses should consider:
crafting the maximum length of the restraint by reference to
the normal cycles of the business, such as the average length a
project or client contract
engaging the employee in dialogue about the restraint clause,
and ensuring that they have had the opportunity to obtain legal
advice on the length and effect of the clause
for lengthy restraints, providing a discrete payment or bonus
in return for agreeing to the restraint.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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