Australia: What constitutes reasonable restriction when examining restraint clauses in employment contracts?

Last Updated: 6 July 2018
Article by Mike Baldwin

The Supreme Court of WA has granted an interlocutory injunction in favour of Austal Ships (Austal) preventing one of its former employees from being engaged in marine operations as an employee of one of its competitors pending the final decision by the court on what constitutes 'Reasonable Restriction' when examining restraint clauses in employment contracts.

Background

Austal designs, builds and maintains large ships for both commercial and naval customers around the world. Austal was one of three companies competing to perform work on the construction of offshore patrol vessels (the OPV project) for the Commonwealth of Australia. However, Austal was unsuccessful in obtaining the project and it was instead offered to one of the competitors, Civmec.

The defendant, Mr Clay, had been an employee of Austal for approximately 3 years and 9 months. He commenced employment at Austal on 18 August 2014 as an assistant projects manager. The employment contract included a restraint clause prohibiting Mr Clay to '[e]ngage in, be involved in, or be associated with, a business competing with the business of the company in the capacity of an... Employee'. Despite this restraint clause, Mr Clay resigned from Austal and accepted a position as project manager for Civmec.

Arguments

Austal argued that Mr Clay was in breach of the restraint of trade clause by his employment with Civmec. The company sought an interlocutory injunction restraining Mr Clay from engaging in the marine operations of Civmec until the outcome of the final proceedings.

Austal's position was that Mr Clay had obtained confidential information throughout the 3 years and 9 months working at the company and consequently there was a risk that the confidential information, regardless of whether he intended to or not, could be misused.

In contrast, Mr Clay argued that the changes in his position of employment and the relatively short time he was at Austal meant that his exposure to any confidential information was "so varied, irregular and superficial that it is not information that can be 'carried away in his head' to the extent that it could be used by a competitor to Austal's detriment". Clay also claimed that:

  • as he was not a part of Austal's business development team, he had no knowledge of Austal's marketing strategy or activities;
  • he did not know all of Austal's customers, and they did not know him;
  • his customer interaction was limited to two discrete periods during his employment at Austal;
  • he has not taken, used or disclosed any of Austal's confidential information;
  • he advised Civmec of his contractual obligations regarding confidentiality of the employment contract;
  • he is working on the OPV project, a project to which Austal has no involvement; and
  • Civmec does not require him to disclose confidential information.

Decision

The Supreme Court granted the interim injunction on the basis that Austal had made out a prima facie case insofar as there was a serious question to be tried that the restraint of trade clause is reasonable and enforceable and the balance of convenience favoured its grant.

Whether there was a serious question to be tried

Smith J found that there was plausible evidence that while he may not be able to recall specific details of plans, strategy or costs of building particular ships, Mr Clay acquired knowledge of the way in which Austal constructs its business pricing and the way in which Austal deals with purchasing and its strategy in tendering for work. This was irrespective of the relatively junior positions he held at Austal and the time he was employed at the company. Mr Clay had attended monthly meetings with the CEO and other senior management up to the time of resignation and had access to high level discussions about work which Austal intended to pursue.

Balance of convenience

Mr Clay contended that to the extent that any confidential information was obtained, this was not relevant to his role at Civmec. Further, there was no evidence that he had removed Austal's confidential information, a matter that was not in dispute by Austal.

Mr Clay sought to argue that granting an interim injunction would result in serious financial hardship and that he would be under significant pressure to find additional work. On this point, Austal contended that any financial hardship which may be suffered by Mr Clay was as a direct consequence of his breach of the restraint of trade clause.

Her Honour acknowledged the possibility of financial hardship, but proceeded to find that the balance of convenience favoured the granting of an injunction restraining Mr Clay from engaging in, being involved in, or being associated with, the marine operations of Civmec in the capacity of employee, contractor, or any other capacity. Her Honour had particular regard to the following factors when considering whether to grant the injunction:

  • Mr Clay commenced employment with Civmec on 11 June 2018;
  • Austal is currently preparing a tender response for the sustainment contract for the OPV contract;
  • Refusing the injunction could result in damage to Austal's business and a signification period of the restraint period passing before there is a trial of the matter;
  • Civmec is a direct competitor of Austal and hired Mr Clay who has current knowledge of Austal's confidential operations;
  • There is a real risk that Mr Clay could reveal confidential information of Austal; and
  • Austal is prepared to draft an interim injunction order to enable Mr Clay to work in a business unit of Civmec which does not compete with Austal.

Implications for employers

This case reinforces the court's approach to the enforcement of restraint clauses in contracts of employment. It follows on Edelman J's decisions in Emeco [2012] WASC 110 and Workplace Safety [2014] WASC 62, with the Court appearing to have taken a broader view of what constitutes 'reasonable restriction' first outlined in Nordenfelt [1894] AC 535. It demonstrates that employees who routinely ignore restraints, are increasingly likely to be injunct should they breach their contract.

It also confirms the court's view of the importance of confidential information and what may happen to an employee, who obtains confidential information from a previous employer and takes up a role with a direct competitor of that business, irrespective of whether they intended to disclose any confidential information or otherwise. Employers should appreciate the importance of a well-crafted restraint and seek advice when contemplating putting in place a contract of employment.

Read: Austal Ships v Clay [2018] WASC 178

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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