Australia: Restraints of trade and customer connections

Last Updated: 8 September 2018
Article by Richard Ottley and Simon Obee

It is well established that restraints of trade in employment contracts will not be enforced by a court if they are considered to be unreasonable.

Sometimes a restraint of trade is deemed to be unreasonable because it operates over too wide an area, or for too long a period of time. Sometimes a restraint of trade will be deemed unreasonable because it does not protect a legitimate interest of the employer – such as the protection of trade secrets or confidential information, or to prevent an employee with close connections to customers from taking those customers with them when they change employment.

With that in mind, consider the following restraint of trade provision used in a contract for a Senior Computer Technician who had frequent contact with his employer's customers:

" 13.1 For a period of three months from the date the employee's employment with the employer concludes (for any reason), the employee may not directly or indirectly, in any capacity whatsoever:

  1. Act for any person or entity (natural or otherwise) that the employer had or has as a client during the six month period immediately prior to the employment with the employer concluding; or
  2. Contact or cause another to make contact with any person or entity (natural or otherwise) that the employer had as a client during the six month period immediately prior to the employees employment with the employer concluding, with a view to enticing that person or entity to use the professional services of the employee or a third party;"

At first blush, this contractual provision seems to "tick a number of boxes" which go to establishing the reasonableness of a restraint of trade, for example:

  • The period of restraint is only for three months (not several years).
  • It only prohibits the employee from acting for or making contract with clients where those clients had been clients of the employer in the 6 months immediately prior to the termination of employment (rather than any client in the history of the company).

Why then was such a restraint deemed to be unenforceable on grounds of unreasonableness by the District Court of Queensland recently in Commsupport Pty Ltd v Mirow [2018] QDC 134?

The judgment is a useful reminder that there is no legitimate interest in an employer using a restraint of trade to prevent competition per se. Rather, a legitimate interest can exist in restraining a former employee where a relationship has been developed between the employee and a customer which could be a contributing factor in the customer's decision to give its business to a competitor for whom the employee goes on to work (see para 58 of the judgment).

The judgment also makes clear that it is more likely to be considered reasonable to restrain an employee from dealing with customers post-termination of employment, if part of the employee's duties at work included cultivating the relationship with those customers (see para 62).

Establishing that an employee had contact with customers will rarely be enough of itself – it is only where the type of contact was such that the employee holds an influence over the customers that a court will readily enforce a restraint of trade (see para 67).

The Judge in Commsupport v Mirow highlighted an issue that frequently arises in the drafting of such restraints:
"67.A point upon which restraints often fail in respect of the customer connection interest, is not that the employee sought to be restrained had no such relationship of influence over customers of the employer, but rather the restraint has been drawn so broadly that it applies not only in respect of those customers with whom there was such a relationship, but also to those whom there was no such relationship. It is at this point that the legitimacy of the interest gives way to the restraint being seen as one merely against competition. The employee could be considered to have no more influence over such customers than a stranger." (footnotes omitted)

In the current case, because the restraint sought to restrain the employee from acting for or contacting any person who had been a customer of the employer in the six months before termination of employment, and did not limit this to those customers with whom the employee had a customer connection, this was found to be a significant contributing factor in the court's determination that the restraint was unenforceable.

Had the case been heard in NSW it is possible the result may have been different – given that NSW courts have more powers to "read down" otherwise unenforceable restraints of trade pursuant to the Restraints of Trade Act 1976 (NSW).

The case is a useful reminder of the importance of not drafting restraint of trade provisions too broadly and, in respect of restraints dealing with the solicitation of customers, considering whether to limit such restraints to only those customers with whom the employee dealt during the employment in say, a set period leading up to termination. Narrowing the restraint in this fashion, may assist in enhancing the enforceability of a restraint by limiting its application to those customers where a customer connection is likely to be found.

The case is also notable on two further grounds. Firstly, it confirms that in assessing reasonableness of restraints the parties' relative bargaining power will also be a relevant factor (see paras 70-85).

In other words, the less bargaining power the employee had to negotiate the terms of the restraint, the more likely the court will be to find it has been unreasonably drafted.

In the current case, the employee was told that the employer would not accept any changes to the wording of the restraint, and was given the impression that their job was at risk if they did not sign the contract. This was a factor taken to be in favour of the unreasonableness of the restraint.

Secondly, the case is notable in that it provided some commentary (albeit brief) on the issue of restraints of trade being void for lack of consideration.

An argument is sometimes run that – in circumstances where a restraint of trade is introduced for an existing employee, but without them being provided with any extra benefit (eg increased pay) – the amendment to the contract of employment lacks "consideration" (which is, of course, an essential element of any contract).

The relevant passage of the judgment is as follows:
"86.On the related issue of consideration, [the Employer's Counsel submitted] that what was being offered in return for the restraint was continued employment which was substantial consideration because it provided ongoing salary, ongoing access to clients and an ongoing ability to learn how the various systems operated while being paid. That is a complete answer to the contention that [the employee] obtained no advantage whatsoever in return for signing the [employment agreement containing the restraint]. Although no authority was cited in support of the submission, it exists.

87.In Electroboard Administration v O'Brien the New South Wales Court of Appeal considered a case in which an existing employee was asked to sign a letter which would add a term in restraint of trade, including post-employment restraint, to her contract. For about a year she worked on without signing the letter, but under mounting pressure eventually capitulated and signed. The trial judge's conclusion was that it was clear that she had signed because she was concerned that she might lose her employment. Of the contention that the new term was not supported by consideration, Meagher JA, with whom Mason P and Priestley JA agreed, said at:
"They lost before Cohen J because his Honour held that the new term was not supported by any consideration. In my view the appellant's are correct in submitting that his Honour fell into error. On his Honour's own finding, the appellants said to Mrs O'Brien 'we shall dismiss you if you don't sign', or alternatively 'we shall not dismiss you if you do sign', I cannot see how such an agreement lacks consideration: this is a benefit to the employers in obtaining the signature, and a benefit to the employee in diverting the prospect of imminent dismissal." (footnotes omitted)

The judgment did not deal with a situation where an employee enters into a new contract of employment containing a restraint in a situation where the employee's employment is not at risk if they refuse to sign. In such a situation – where the employee is not provided with any additional benefit for signing (such as a pay rise) – it would seem it will still be open to the employee to argue that the restraint entered into was void for lack of consideration.

Employers are therefore advised to consider the issue of consideration carefully when entering into new contractual restraints with existing employees.

For further information please contact:

Richard Ottley, Partner
PHONE: +61 2 9233 5544

Simon Obee, Senior Associate
PHONE: +61 2 9233 5544

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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