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
EMAIL: RBO@SWAAB.COM.AU

Simon Obee, Senior Associate
PHONE: +61 2 9233 5544
EMAIL: SRO@SWAAB.COM.AU

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions