Restraining restraints of trade.

Still spritely at age 243…

Restraint of trade is a well established and ‘old world’ common law doctrine. It relates to the enforceability of contractual restrictions on freedom to ‘ply one’s trade’ or conduct business activities. In the 1771 case of Mitchell v Reynolds1, it was stated as follows:

 ‘it is the privilege of a trader in a free country, in all matters not contrary to law, to regulate his own mode of carrying it on according to his own discretion and choice. If the law has regulated or restrained his mode of doing this, the law must be obeyed. But no power short of the general law ought to restrain his free discretion.’

Present day

Restraint clauses are commonly found in employment agreements and business sale agreements. If properly drafted the geographical and temporal restraints will be structured in a cascading fashion, starting at a more restrictive level and cascading down gradually to become less restrictive.

This easing of restrictions usually relates to duration and geographic locations, during, and in which an individual is restrained from performing similar or competitive services. Hence the contractual provisions often go beyond the ‘general law’ in attempting to restrain individuals from performing certain tasks, competing with an employer or conducting business in general. 

Cascading limbs

The reason restraint clauses are structured in this cascading manner is that if the most restrictive limb(s) are struck out when challenged, the less restrictive limbs remain in place. But, without cascading provisions where only one restraint limb exists and it is struck out, no provisions remain and the entire provision becomes ineffective.

It is crucial that employers, seeking to restrain employees from competing with them, do so in a calculated manner. Courts will often strike out restraint provisions that go beyond the protection of their own legitimate business interests. Hence the need to be ‘restrained’ when seeking to impose restraints.

Let the chips fall where they may

Two recent cases demonstrate that the Courts can come down on either side of the argument, depending on the specific facts of each case.

HRX Holdings Pty Ltd v Pearson

The Federal Court of Australia in HRX Holdings Pty Ltd v Pearson2 upheld a two year restraint of trade clause when Pearson moved to a competing recruitment company. The Court found that the clause was reasonable and enforceable in the circumstances against a co-founder of a company. In reaching this conclusion, the Court took into account the long period of negotiation between the parties, as well as the specific consideration given for the relatively long period of restraint. Whilst clearly turning on its facts, this landmark decision highlighted that a relatively long restraint of trade clause, tailored to the business and the individual employee, may be valid.

Wallis Nominees (Computing) Pty Ltd v Pickett

Conversely, the Supreme Court of Victoria in Wallis Nominees (Computing) Pty Ltd v Pickett3, held that the restraint of trade in Pickett’s employment contract was not enforceable. The clause sought to prohibit Pickett from providing services to clients within 12 months after his departure from the business. In striking out the restraint provision, the Court noted that even if the clause were enforceable, it provided greater protection than necessary to Wallis and would be unreasonable in all the circumstances given Pickett’s role within the company.

Interpretation of the facts

As is evident from these two judgements, cases involving allegations of breaches of restraint provisions, or allegations of unenforceable restraints, turn on the facts and circumstances of each matter.

It is notoriously difficult to predict which way Courts will turn when deciding such matters. Accordingly businesses should not:

  • seek to impose off the shelf restraint provisions; or
  • expect such restraint provisions will automatically be deemed to be reasonable and enforceable.

Consideration of an employer’s own legitimate business interests, together with the livelihood entitlements of the individual in question, must be carefully factored when drafting, or seeking to enforce, restraint of trade provisions.


1 Mitchell V. Reynolds ((1711), 1 P. Wms. 181)
2 HRX Holdings Pty Ltd v Pearson [2012] FCA 161
3 Wallis Nominees (Computing) Pty Ltd v Pickett [2012] VSC 82


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Ben Krasnostein
Categories:
Commercial & Corporate
Employment
Litigation & Dispute Resolution

Posted on: 23 July 2014