Restraints of trade have never been more enforceable

In brief

Restraint of trade clauses in contracts of employment have never been more enforceable, particularly in Victoria.

What you need to know

• Employers need to provide justification of the level of restraint documented
• Each situation is different and restraints of trade should be tailored to the position and level of employee in terms of length, duration in time and scope of restricted activity
• The validity and details of the restraint in an employment contract is determined at the date the employment agreement is entered into

It has been well settled at common law that restraints of trade applying to the activities of former employees, are prima facie “void” or unenforceable, as contrary to public policy.

The presumption can, however, be rebutted and the restraint justified by the special circumstances of a particular case, if the restriction is reasonable by reference to the interests of the former employer and employee to be restrained. The validity of the restraint in a contract of employment is to be judged at the date the employment agreement is entered into, although this can be informed by what was reasonably foreseeable by the parties at that time.

Balancing the competing interests

A stricter view is taken of restraints in employment contracts than those contained in contracts for the sale of business where the vendor receives consideration for the sale of goodwill. However, an employer has the right, as a condition of employment, to protect goodwill in the form of trade secrets and customer connection, from the unfair competition of ex- employees. This is balanced against the public interest in ensuring that individuals are not robbed of their ability to earn a living and apply their skills, experience and general know how.

Onus of proof

The former employer has the onus of proving the special circumstance justifying the restraint. So far as the balancing of interest is concerned, the restraint must impose no more than adequate protection to a former employer. If the Court is satisfied that the restraint confers greater protection than can be justified, there is no further issue of reasonableness. That is, the former employer must not over-reach and seek greater protection than is necessary to protect its trade secrets and customer connection, even if it would be convenient of expeditious for the former employer to do so. This requirement has led to the common use of so called “cascade” or “waterfall” clauses. These clauses set out a series of varying time periods and geographical areas which appear successively numbered so as to maximise the time period and area of restrained activities within what is judged to be reasonable, and going no further than that by severing the remaining parts of the restraint clause which exceeds what is judged to be a reasonable time period and geographical area.

Application

The meaning and application of the restraint clause will be construed by reference to the factual matrix, documentary context and surrounding circumstances. This has meant that in Victoria, a restraint of trade for three years applying to a senior accountant preventing him from providing services to former clients he serviced at the accountancy practice has been held to be reasonable and enforceable.¹ However, a restraint of 12 months applying to an IT consultant who went and joined one of the customers of the IT consultant’s former employer was struck down as being excessive. Its application was not limited just to clients who the IT consultant had provided specific services to whilst employed, but also to any client that the IT consultant had cause to be in contact with during the normal course of employment.²

Conclusion

This means that the length, duration in time, and scope of restricted activity in restraint of trade clauses should be tailored to the matter at hand. This is certainly a case where less is more. That is, a restraint of trade is more likely to be enforceable if the employer seeks no more protection than is adequate to protect its trade secrets and customer connections from unfair competition. Equally, employees should be careful in entering into employment contracts knowing that well-drafted restraint of trade clauses are more likely to be enforceable than has historically been the position and take appropriate advice.

1. Birdanco Nominees Pty Ltd v Money [2012] VSCA 64
2. Wallis Nominees (Computing) Pty Ltd v Pickett [2013] VSCA 24