A preliminary ruling (injunction) by the WA Supreme Court found a 10 year restraint of trade period to be reasonable.

In Issue

  • Whether a business can enforce a 10 year restraint period against a former owner and employee.

Background

The Defendant, David Cook, founded a business which serviced and repaired hydraulic cylinders. Cook entered into an agreement to sell the business to the Plaintiff, Devil Dog Pty Ltd (Devil Dog).

The business was sold for $650,000.00, with the majority of the sale monies being attributable to goodwill. The agreement contained a restraint provision whereby Cook was not to engage in any similar business for a period of 10 years.

Cook worked for nearly two years in the business after its sale before resigning and commencing work in a rival business known as Allwest which had been established by a former employee of Devil Dog.

On resigning from the business and commencing work with the rival business Devil Dog received reports from customers of being approached to transfer their business to Allwest.

Devil Dog sought an injunction on the basis it was entitled to the benefits of the reasonable restraint of trade, the restraint was being breached and an injunction was necessary to protect its rights.

General Principles Applicable to Restraints of Trade

  • Restraints of trade will be held void unless they can be justified as reasonable.
  • A party seeking to enforce a restraint of trade clause in a contract carries the burden of proving that the restraint is reasonable.
  • When considering whether the restraint is reasonable the amount of the purchase price paid when the business is sold (particularly an amount for goodwill) is relevant to the question of reasonableness but is not decisive.
  • A restraint will be imposed more readily and more widely upon the vendor of the business in the interests of the purchaser than upon a former employee in the interest of the employer.
  • Whether a restraint is unreasonable is to be determined by its effect and operation in practice.

Decision at trial

On balance a prima facie case (albeit one accepted to be not without difficulty) was made out that a 10 year restraint period was reasonable.

In reaching this conclusion the Court had regard predominantly to the following:

  1. On the face of the Purchase Agreement over 90% of the purchase price paid by Devil Dog was attributable to goodwill. This indicated the business had the benefit of repeat business and enjoyed customer loyalty
  2. Cook had a strong personal connection with customers of the business
  3. Of less significance, but still influential, was that the 10 year period was what was negotiated and agreed between the parties.

The balance of convenience rested with granting the interlocutory relief as damages were unlikely to be an adequate remedy to Devil Dog and the Court was satisfied that Cook could earn money other than working in a business involving servicing of hydraulic cylinders. Cook also had the protection of an undertaking from Devil Dog as to damages.

Accordingly, injunctive relief was granted pending a full hearing.

Whilst the Court acknowledged that Devil Dog faced difficulties, there was at least a prima facie case that a restraint period of 10 years was reasonable in circumstances where the sale of the business included a substantial component of goodwill and the vendor of the business had a very close and personal connection with customers of the business.

Implications for you

A person who is subject to a restraint of trade clause (particularly where that person is a Vendor of a business) should not assume that a restraint of trade clause that, on its face, operates for an unreasonably lengthy period of time will be unenforceable.

As demonstrated in the above case, the totality of the facts and circumstances of each case will need to be considered before an assessment can be made about the reasonableness and enforceability of such a clause.