Australia: The enforceability of international restraints: a business protection tool

International employers with a mobile workforce who have businesses or competitors in Australia can take some comfort from this initial decision.

The enforcement of restraints of trade in Australia has often been seen as overly difficult, a fact that is heightened when the employer is offshore with only limited operations in Australia. What law is to be applied? What provides the most valuable protection for the employer? How will Australian courts assess reasonableness?

In considering these matters the Western Australian Supreme Court, in Naiad Dynamics US Ink v. Vidakovic [2017] WASC 109, has applied foreign and Australian law to grant an interlocutory injunction and consider the enforceability of a restraint of trade clause in favour of the business interests of a US employer over the rights of an expatriate Australian returning to Australia to work for a competitor.

This decision will come as welcome news to international employers and highlights the value in seeking multi-jurisdictional legal advice before drafting restrictive covenants into employment contracts.

The overseas employer, the ex-employee and the non-competition clause

The plaintiff, Naiad, is a company incorporated in Connecticut, USA. Its business is the design, engineering, manufacture, installation and sale of maritime stabilisation, manoeuvre and ride control systems in the global luxury yacht, commercial shipping and military shipping markets.

The defendant, Dr Steven Vidakovic, is an Australian native and, until January 2017, Naiad's Global Sales Director.

Dr Vidakovic resigned from his position at Naiad and returned to Perth to work at Veem Ltd, an Australian competitor of Naiad, as its Global Sales Manager.

The contract of employment between Naiad and Dr Vidakovic included a non-competition clause (that sought to prevent Dr Vidakovic from working with a competitor for a period of 24 months in specific US states and other countries, including Australia). To enforce the contract Naiad sought an interlocutory injunction restraining him in the Western Australian Supreme Court.

Dr Vidakovic defended this action by arguing that (among other things):

  • the non-competition clause was unreasonable and, therefore, unenforceable; and
  • a non-solicitation of customers clause found in the agreement is enough to protect Naiad's legitimate business interests in the circumstances.

What law to apply to determine if an injunction should be granted?

It was common ground between the parties that the law of Connecticut governed the contract and should be applied to decide the enforceability of the non-competition clause.

However a plaintiff who seeks to enforce a right governed by a foreign law can only obtain relief in the form and manner that the forum provides. Accordingly, the laws of Western Australia were applied by the Court to decide whether to grant injunctive relief. That is, does the plaintiff have a prima facie case that the non-competition clause is enforceable?

So while the restraint itself needed to be considered reasonable in accordance with Connecticut law, the question of whether an injunction was necessary to manage the damage potentially sustained by Naiad if the employment with the competitor was allowed to continue was to be assessed in accordance with the laws of Western Australia.

Was the restraint clause reasonable?

In applying Connecticut legal principles to the facts of the case, the Court found in favour of granting the interlocutory injunction and made the following findings in support of the reasonableness of the clause:

  • Having regard to the nature of Naiad's business and the order cycles, that is the usual time between receiving a request to tender and securing an order, it could reasonably and legitimately be found that a two-year restriction was reasonable.
  • Naiad actively sells to customers in Australia. Naiad sales staff are the principal point of contact for all new and existing customers and, as Global Sales Manager, Dr Vidakovic personally interacted with customers. Therefore, a restriction that applies to territories in Australia was not unreasonable.
  • Dr Vidakovic's knowledge of Naiad's customer list and his connection with Naiad's customers was a potential threat to Naiad's business, and Naiad was entitled to protect that for a reasonable period of time.
  • While Dr Vidakovic has a particular speciality in the field of sales of ship stabilisation, ride control and motion control systems, the evidence did not establish that he is prevented from supporting himself and his family in any other employment.

But is an injunction necessary?

The Court was in favour of granting the injunction mainly because the sales director agreed to the restraint clause as part of the contract at the time of his employment with Naiad. While the Court was not making a final assessment of enforceability the restraint was described as "not clearly unenforceable".

"To the contrary, there is a prima facie case that it is enforceable," the Court said, adding that in these circumstances the sales director "should be held to his bargain unless and until it is determined at trial that the restraint is unenforceable".

Key takeaways for international employers

International employers with a mobile workforce who have businesses or competitors in Australia can take some comfort from this initial decision.

While there appears to be a general reluctance in Australia to pursue or enforce restraint clauses this case demonstrates that the courts can take decisive action to provide meaningful protection to businesses where:

  • the parameters of the restraint clause are considered reasonable and appropriate based on business need; and
  • the employer is able to demonstrate business impact.

If the employer is seeking to have a clause operate consistent with laws other than Australia's, but still ensure it can be enforced in Australia (by way of injunction), multi-jurisdictional advice at the time of drafting will also be important.

This decision also assists in confirming that:

  • a senior manager's relationships with customers is a category of business interest that an employer can take action to protect;
  • the connection to customers can be protected without evidence of confidential information being leaked; and
  • the addition of a non-solicitation of customers clause does necessarily mean that a non-competition clause will be found to be unreasonably restrictive.

Naiad's case was undoubtedly assisted by a detailed and clearly worded restraint of trade clause. This further highlights the importance of careful drafting when including covenants that seek to restrict the rights of employees, particularly when that restriction extends internationally.

While the matter is not over and Naiad will still need to prove the enforceability of the restraint for final orders, an interlocutory injunction is a significant step and important business protection measure.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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