The Victorian Court of Appeal has upheld the decision of the Supreme Court that a restraint of trade clause preventing a Chief Financial Officer from working for a rival retailer was broader than what was reasonable to protect the employer’s legitimate interests.

Implications for employers

This decision reinforces the importance of carefully drafting post-employment restraint clauses so that they only protect the employer’s legitimate interests. A widely drafted restraint clause which prevents an employee from working for many entities, where there is no proof of competition or relevance of confidential information, may not be enforceable. A significant disparity between the length of a restraint period imposed by a clause and the amount of termination notice an employer is required to give an employee may be relevant to determining whether the restraint period is reasonable.

Background

In June 2016, Just Group Limited (JGL) (a large retail group including Just Jeans, Peter Alexander and Portmans) commenced proceedings in the Supreme Court after their Chief Financial Officer, Nicole Peck, advised them she was leaving the company to work for Cotton On Group (Cotton On), a major competitor. JGL argued that the proposed employment was in breach of a restraint clause in its employment agreement with Ms Peck. Ms Peck had commenced working for JGL in January 2016 and tendered her resignation not long after, on 2 May 2016.

Ms Peck’s employment contract contained wide restraints, precluding her from certain conduct during and after her employment. It barred her from acting for or on behalf of up to 50 other entities and brands (including Cotton On) and restrained her from commencing employment in Australia and New Zealand for a maximum period of up to 24 months. The contract listed "restricted activities" that precluded her from certain conduct during and after her time with JGL and engaging in "any activity" which was "the same as or similar to" her current employer. The contract also provided for a probationary period of six months during which time JGL could terminate Ms Peck’s employment with one months’ notice. The contract stated that both JGL and Ms Peck considered the restraints and notification obligations to be reasonable.

JGL sought to justify what Justice McDonald described as "very wide restraints" citing the fierce competition between it and Cotton On and the damage that could be inflicted on its business if Ms Peck commenced employment with Cotton On, particularly in light of the volume and nature of JGL’s confidential information to which she had been exposed to during the course of her employment.

The central issue for determination was whether the post-employment restraints in Ms Peck’s contract of employment were enforceable. The key consideration was whether the restraints went beyond what was reasonable to protect JGL’s legitimate interests. A secondary issue was whether Ms Peck breached a term of her contract requiring her to provide notice to JGL in the event she entered into any discussions with a prospective employer during her employment.

Legislation and case law

If Ms Peck’s contract had been subject to the laws of New South Wales, section 4 of the Restraints of Trade Act 1976 (NSW) would have allowed the court to ignore the fact that a restraint goes beyond that which is reasonable, provided that in the circumstances of the actual breach, the restraint can be enforced to an extent that is reasonable. However, these proceedings were subject to the common law, unqualified by statute. This meant that the court could not assess the reasonableness of the restraints in Ms Peck’s contract simply by reference to her proposed employment with Cotton On. Cotton On was one of 50 entities and brands in respect of which the restraints operated. Therefore, the reasonableness of the restraints had to be assessed by reference to all 50.

Justice McDonald cited the principles to be applied in assessing the enforceability of a restraint of trade as set out by the Court of Appeal in Wallis Nominees (Computing) Pty Ltd v Pickett (2013) 45 VR 657:

  1. a contractual provision in restraint of trade is, prima facie, void;
  2. 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 parties;
  3. the validity of the covenant in a contract is to be judged as at the date of the contract;
  4. a stricter view is taken of covenants in restraint of trade in employment contracts than those contained in contracts for a sale of a business;
  5. the onus of proving the special circumstances justifying the restraint is on the person seeking to enforce the covenant;
  6. so far as the parties’ interests are concerned, the restraint must impose no more than adequate protection to a party in whose favour it is imposed. If the court is satisfied that the restraint offers greater protection than can be justified, there is no further issue of reasonableness;
  7. the meaning of the restraint clause may be construed by reference to the factual matrix, documentary context and surrounding circumstances.

Justice McDonald cited authoritative statements of principle set out in Adamson v New South Wales Rugby League [1991] FCA 425 and Geraghty v Minter (1979) 142 CLR 177, which require an assessment of reasonableness of a restraint by reference to what the restraint requires or permits the parties to do. Parties cannot ignore or treat as outside contemplation an occasion or event which fairly falls within the terms of a clause, just because it is an unlikely possibility.

Decision at first instance

In dismissing JGL’s application, Justice McDonald held that notwithstanding JGL’s legitimate interest in seeking to protect its confidential information, the restraints imposed upon Ms Peck were not reasonable and were not enforceable. Ms Peck was also held not to have breached the notice provision of her contract because the clause was not enforceable.

In construing the restraint clauses, there were a number of issues determined by Justice McDonald. First, the restriction on Ms Peck from engaging in "any activity" which is "the same or similar to" her current employer had the effect of preventing her from being employed in any role at a competitor, even where the confidential information obtained in her role at JGL would not be relevant to that role and as such extended beyond what is reasonable to protect JGL’s legitimate interests. Secondly, JGL led no evidence regarding the commercial activities of 46 of the 50 brands/entities which were listed in the restraint clause. Properly construed, this clause would prevent Ms Peck from taking up employment in a role where confidential information acquired during the course of her employment with JGL would be of no relevance to her new employer.

Justice McDonald also held that the restraint periods ranging from 12 to 24 months were unreasonable because of the disparity with the one month notice period or payment in lieu, upon which Ms Peck’s employment could have been terminated during the first six months of her employment.

The Court would not sever the other entities from Cotton On because the clause created a single covenant restraining Ms Peck from working for any of the 50 brands/entities listed, and severance would require the Court to engage in the task of "curial disentanglement to salvage a patently unreasonable restraint".

Accordingly, JGL’s application for injunctive and declaratory relief was dismissed.

Decision on appeal

The Court of Appeal, comprising Beach, Ferguson and Riordan JJ dismissed an appeal by JGL, upholding the trial judge’s decision.