The Facts

Employee's employment contract includes restraint of trade clause

The company in question manufactured and sold school uniforms in NSW. The employee had worked in that industry for many years before she joined the company in July 2015. Her employment contract with the company included a "restraint of trade" clause, restraining her, in the event she left her employment at the company, from starting up her own business in competition with the company for a period of either three or six months.

The employment contract also contained a clause requiring her to refrain from misusing or disclosing confidential information of the company either before or after termination of her employment.

Restraint of trade clause removed when new employment agreement drafted

The employee informed the general manager of the company that she wanted to set up her own business. During that discussion, she mentioned the restraint of trade clause in her contract and the fact that she would not be able to start up her own business for six months because of that provision.

The general manager understood that the employee would be selling school uniforms in competition with the company. Nevertheless, he authorised replacing her original employment contract with a new agreement, which instead contained a more limited "non-competition" clause that prevented her from "canvassing, soliciting or inducing customers and suppliers not to continue their relationship with [the company]".

Employee begins to set up own business while still employed by company

However, the general manager later became aware that prior to any discussion of her resignation and while still an employee of the company, the employee had already started setting up her own business and seeking to attract customers.

It also emerged that as part of these preparations, the employee had copied for her own use confidential information belonging to the company, including "DST files" for some schools and other educational institutions. (A DST file is a computer program used by a computerised embroidery machine to embroider the logo and other details onto a school uniform.)

The company took the view that the second employment contract should be regarded as void because of the employee's conduct and bad faith.

It was up to the court to decide whether the restraint of trade in the original employment contract should be enforced.

Case A - The case for the ex-employee

Case B - The case for the company
  • At the time we negotiated the second employment contract, the company knew that I wanted to leave to set up my own business selling school uniforms in competition.
  • The company knew that due to my years of employment in the industry, I had very substantial knowledge of the school uniform market in NSW, as well as information which the company now says is confidential.
  • Given this knowledge, the general manager was aware of the amount of protection the company would need and was at liberty to bargain accordingly.
  • My family and I would suffer extreme financial hardship if I was prevented from working altogether by a restraint order.
  • I am prepared to submit to orders not to disclose or use trade secrets or any confidential information of the company.
  • It beggars belief that the ex-employee thought she was entitled to take our DST files and other confidential information to use in her own business. She has contractual and general law obligations to the company of good faith and fidelity.
  • The second employment contract is void or voidable because it was entered into in bad faith, or by misrepresentation or misleading and deceptive conduct, as the ex-employee had already begun to set up her business without our knowledge before it was negotiated.
  • A restraint against competition clause is justified because it is the only realistic way to protect the company from abuse of its confidential information – a legitimate proprietary interest.
  • The ex-employee should be restrained because she was at fault in setting up her own business while still employed by the company.

So, which case won?

Cast your judgment below to find out

Vote case A – The case for the ex-employee
Vote case B – The case for the company

Clayton Davis
 Commercial litigation & dispute resolution
 Stacks Law Firm

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