Australia: Employee restraint of trade voided by non-compliance with contract by employer

Restraints of trade in employment contracts may be difficult for an employer to enforce if they have not performed their contractual obligations. This was made clear in a recent decision by the Supreme Court of Victoria (SCV) in a contractual dispute between Crowe Horwath (Aust) Pty Ltd (CHA) and its ex-employee Anthony Loone (Loone).1

How the Dispute Arose

On 1 November 2012, Loone entered into an employment contract with CHA as the Managing Principal of CHA's Launceston accounting office (the Contract). Among other things, the Contract contained a restraint of trade that prevented Loone from soliciting CHA's clients, and from conducting any business similar to or in competition with CHA within a 5km radius of the Launceston office for a period of 12 months following termination (the Restraint).

CHA would pay a bonus to Loone in any given year, in an amount calculated at CHA's discretion, taking into account prescribed mandatory criteria, including Loone's personal performance, the performance of CHA and broader economic conditions (Incentive Scheme).

In 2014 and 2015, Loone contributed significantly to CHA's successful acquisition of an accounting firm in Launceston, leading him to believe that the associated profits would be considered as part of CHA's calculation of his yearly bonus. By way of a telephone call on 1 July 2016, Loone was informed by his superiors that those profits would be excluded from the calculation of the bonus pool for CHA's Launceston office.

On 9 June 2016, during a presentation by senior executives of CHA, Loone was alerted to a proposed alteration of the Incentive Scheme, whereby CHA intended to defer payment of 20 per cent of annual bonuses for a period of three years.

When Loone terminated the Contract on 12 July 2016, CHA applied to Court and obtained an interlocutory injunction which prevented Loone from providing accounting services to 89 clients with whom he had dealings in the previous 12 months.

Enforceability of the Restraint

The SCV found that the Restraint was reasonable in the circumstances because it did no more than was necessary to protect CHA from the loss of clients with whom Loone had developed a close personal relationship. In a plea for the SCV to interpret the Restraint broadly, CHA argued that the Restraint applied to 881 clients that had 'direct dealings' with Loone, as opposed to the 89 clients that had 'direct personal dealings' with Loone. The SCV rejected this interpretation of the Restraint on the basis that, if accepted, it would make the Restraint unreasonably broad and therefore unenforceable.

Repudiation and Termination

Loone sought to establish that the Restraint did not survive termination of the Contract because CHA had repudiated the Contract. A party is said to repudiate a contract by demonstrating to the other party an intention not to comply with its contractual obligations. Repudiation by one party entitles the other party to either accept the repudiation and terminate the contract or affirm the contract and continue to perform their contractual obligations.

The SCV held that CHA repudiated the Contract on 1 July 2016 when Loone's superior communicated CHA's intention to exclude the profits associated with the acquisition from the assessment of Loone's yearly bonus. In this respect, it was not the quantum of any bonus that Loone disputed, it was CHA's failure to take into account the profits associated with the acquisition when assessing Loone's bonus pursuant to the Incentive Scheme.

Further, the SCV found that CHA's decision on 9 June 2016 to defer payment of 20 per cent of bonuses for three years also constituted repudiation: there was nothing in the Contract authorising CHA to withhold any proportion of a bonus once the quantum of the bonus had been determined.

CHA claimed that Loone had not validly terminated the Contract, but rather, he had affirmed the Contract because of the delay between each repudiatory breach (9 June 2016, 1 July 2016) and the date of termination (12 July 2017). However, case law on the issue of delay provides that if an employee communicates their objection to their employer's conduct, they are generally not taken to affirm the contract merely because they have continued to work and receive remuneration. The evidence showed that at around the time of CHA's repudiatory conduct, Loone expressed to his superiors his concern and indignation regarding CHA's non-compliance with the Incentive Scheme. Therefore, despite his delay, Loone was entitled to accept CHA's repudiation and terminate the Contract.

Effect of Termination on Enforceability of Restraint

The SCV had to consider whether the Restraint survived termination of the Contract. On this point, neither party could point to a case where an Australian Court has enforced a restraint of trade in circumstances where an employee has terminated a contract by accepting their employer's repudiation.

Loone argued that the Incentive Scheme was quid pro quo for the Restraint, such that CHA was only entitled to enforce the Restraint if it had complied with its obligations pursuant to the Incentive Scheme; and further, if the Restraint was to survive termination for a repudiatory breach, the Restraint could not be considered reasonably necessary to protect CHA's legitimate interests and would therefore be unenforceable.

The SCV was persuaded by Loone's submissions, and went on to say that even if the Restraint were to survive termination of the Contract in this case, it would be inconsistent with equitable principles for the Court to grant an injunction to CHA in circumstances where it has failed to perform its part of the bargain.

Significance of the Case

In light of this case, it is unlikely that Courts will enforce a restraint of trade in circumstances where the employee has terminated the contract as a result of the employer's repudiatory breach.

Employers should be mindful of the type of conduct that could constitute repudiation: wrongful dismissal or underpayment of remuneration, for example. This case, a cautionary tale, demonstrates the consequences flowing from an employer's repudiatory breach of an employment contract. Employers should avoid conducting themselves in ways that demonstrate, to a reasonable person in the position of their employee, an unwillingness to perform their contractual obligations as employer.

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Authors
Lachlan Chisholm
 
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