Australia: Restraint of trade update: Prevention is better than cure

Employers often retain me to help them enforce restraint of trade clause. Issuing proceedings of this type is often a case of the horse having already bolted as Court orders only address customer solicitation in breach of a contract after it has already occurred. An injunction and compensation might be available but, by this time, the damage to the business has begun.

The key when key executives and customer-facing employees are leaving your business is to act swiftly to protect your customer connection. This simple checklist is designed to get you thinking about some easy to implement strategies that may eliminate the need for you to apply for court orders:

  • consider a longer notice period in your employment contracts
  • implement an approved form of customer communication for this circumstance
  • consider the value of placing the employee on "garden leave"
  • arrange an early meeting
  • document follow up actions by letter
  • send another letter on termination and include a reminder about the restraint, and
  • write to the new employer, if known.

Consider a longer notice period

A longer notice period gives business more time to find a replacement who can quickly establish contact with the customer maintained by the exiting employee. While this means paying the exiting employee for longer, it gives the employer the benefit of a restraint period.

There's always a risk that the exiting employee will contact customers while they're still employed, even if they are directed to perform no duties (known as "garden leave") and told not to contact customers. However, it's a risk less likely to eventuate than an employee leaving after a short period of notice (or no notice if paid in lieu) and immediately contacting customers in breach of their restraint. There's a solid legal remedy available for breach of duty during a notice period and it's an easier case in court for the employer than enforcing a restraint of trade.

Arrange a meeting at the earliest opportunity

After the employee has given notice of resignation, arrange a meeting for the purpose of:

  • clarifying what the employee's duties will be during the notice period. If directed to take "garden leave", be sure the employee understands they remain an employee until the effective termination date
  • giving clear directions about what the employee should tell existing customers or directing them on how to respond if a customer contacts them while on "garden leave"
  • retrieving the employee's phone and other devices, and
  • reminding the employee that on termination they're bound by the restraints in their contract.

Follow the meeting up with a letter

It's always a good idea to confirm what was agreed on, or what the employee was directed to do, in writing. Add a reminder about the restraint in the letter and use the express wording from the contract or enclose a copy of the employee's contract.

Another letter on termination

At the end of the notice period, the employee should again be reminded about their contract's restraints. Again, use the express wording from the contract or enclose a copy of the employee's contract.

Letter to the new employer

If known, you could write to the new employer, providing them with a copy of the employee's contract and putting them on notice that the employee is bound by the contract's restraints. If there's a concern about any information that may be caught by privacy laws in the contract, put the express wording of the restraint from the contract into the letter to the new employer.

Recent decisions

Don't delay: Fairfax Media Management Pty Limited v Harrison [2014] NSWSC 470

Fairfax was unsuccessful when attempting to restrain an executive from working for a competitor, Yahoo!7. This was primarily due to a three-week delay by Fairfax in responding to a letter from Yahoo!7 and then a further week's delay in commencing proceedings.

The decision was made despite Justice Ball finding that Fairfax had a strong case for the six-month restraint, considering the executive's seniority, and noting it could take some time to replace him and that his replacement would likely require some time to build up similar connections.

Of importance to the decision was that there were only seven weeks left on the restraint. The three to four-week delay in this context was more significant, and the Court had to more carefully consider the strength of the Fairfax case as it would effectively be final relief.

Assessing damages for breach of restraint: Andrews Advertising Pty Ltd v David Andrews [2014] NSWSC 318

Once breach of restraint is established (and leaving aside whether interlocutory or final injunctions are granted), what considerations do courts take into account when assessing damages?

In this case the NSW Supreme Court found that had the employee simply resigned and obeyed the restraints binding him, it was more likely that the employer would have retained the clients until the employee was again free to deal with those clients.

This is despite evidence from one of the clients that they were taking the work "internally into our business" and had some complaints about the old employer. The Court rejected the client's evidence, concluding that any complaints that the client held were not of such magnitude that they would have gone to a new agency in the interim period, before the employee could work with them.

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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