Including appropriate restraint clauses in an employment contract or contractor agreement can be an effective way to protect trade secrets, confidential information, and customer networks. It can help protect you both during the employment or contractor relationships and afterwards.

However just because an agreement contains a restraint clause does not automatically mean the Courts will enforce it.

In order to enforce a restraint provision, it must be demonstrated that the party seeking to enforce the restraint has a legitimate business interest to protect and that the restraint is reasonably necessary to protect that interest.

Two recent cases where the Courts have awarded injunctions upholding restraint clauces.

In Epichealth Pty Ltd v Yang [2015] VSC 516 the Court ordered a doctor to stop working for his newly established medical practice because it breached a restraint clause in his contract with the practice he has been providing services to, which restrained him from operating an alternative practice.

The doctor had full access to the centre’s patient database, including addresses and other personal information for all patients, not just those he was treating. The excistig practice argued that the doctor had established patient contact by using its assets and patient database.

The Court upheld the right of the excisting practice to restrain the doctor from competing with it anywhere within a 10 kilometre radius for the balance of his 6 months notice period plus another 3 months. The Court considered that if the restraint was not enforced the exicting practice would be permanently deprived of the protection afforded to its business by the contract.

Another factor that assisted the Court finding in favour was that the contract signed by the doctor included an acknowledgment by the doctor that the restraints were fair and reasonable.

When first questioned about the his involvement with the competing practice, the doctor provided misleading and evasive information. The Court considered the doctor’s lack of honesty to be evidence that the doctor understood his activities were in breach of his contract.

Similarly in BDO Group Holdings (Qld) Limited v Sully [2015] QSC 166, orders were sought to enforce non-competition restraint clauses that featured in an accountant’s Employment Agreement and Shareholder’s Agreement. Both agreements prohibited the soliciting of employees and the provision of accounting services to clients of the practice.

The Court upheld the restraints as enforceable against the accountant for a period of 12 months after determining that the company’s goodwill and established customer connections were a “legitimate interest” which it was entitled to protect. The time period for the restraint was considered reasonable to support such goodwill, connections and to enable a rapport to be established with the whole of the employee’s former client base. Emphasis was also placed by the Court on the fact that the accountant had acknowledged the reasonableness of the restraint clauses when executing the agreements.

Lessons learnt

These cases are recent examples of the Courts’ view that in order for a restraint to be reasonable it must be demonstrated that:

  • the party seeking to enforce the restraint has a legitimate interest in imposing the restraint – eg. the restrained party has access to confidential information that goes beyond mere ‘know-how’; and
  • the scope of the restraint is no wider than reasonably necessary to protect that interest. This will depend on the facts and circumstances of the particular case, such as how long it takes to replace an employee and re-establish client relationships.

Without satisfying these elements, a restraint is unable to be enforced.

Careful drafting of employment and contractor agreements is your best investment

Firstly, make sure your employment contracts and your contractors agreements are valid restraint provisions.

Secondly, be sure to review your contracts regularly as business needs, employee and contractor duties evolve.

Thirdly, if you suspect a current or former employee or contractor may be in breach of their restraint, seek legal advice immediately.

Working with an employment lawyer who understands the way restraints can work and their limitations, maximises your prospect of not having a problem in the first place and of being able to successfully enforce your rights if necessary.