In August 2011, the Supreme Court of New South Wales handed down its judgment in the matter of Hunter v Koulouris, providing a useful summary of the current state of the law on restraints of trade in NSW. Mr Hunter and Mr Koulouris had operated Johnson Professional Window Films Pty Ltd, parting ways in 2008 when Mr Hunter bought out Mr Koulouris. Mr Koulouris was restrained by deed from competing with Mr Hunter’s business for five years. Mr Hunter alleged that Mr Koulouris competed against Mr Hunter and Johnson Professional Window Films within the five year period of restraint. The main issue between the parties was the validity of the five year restraint clause.
Under section 4 of the Restraints of Trade Act 1976 (NSW), a restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not. Justice Davies noted made the following observations:
- (onus of proof) At common law, the onus was on the person seeking to enforce the restraint. Although the position is not so clear under the Restraints of Trade Act, the Act might suggest that the onus was on the person asserting that a restraint was against public policy. However, the Court has previously held that under the NSW Act the onus is on the person seeking to enforce the restraint. His Honour concluded that he did not need to consider the question of onus of proof in this case;
- (reasonableness and validity of a restraint clause) The reasonableness and validity of a restraint clause should be assessed at the time of entry into the contract;
- (a distinction should be observed between the sale of a business and its goodwill on the one hand, and a restraint by an employer of an employee on the other hand) A restraint would be more favourably regarded in the former case because of the necessity depreciation in the value of the goodwill sold if there was no such restraint;
- (particularly in the case of a restraint on an employee, there is no one correct test for reasonableness) The test may be how long it would take a reasonably competent employee to establish a rapport with the customers; or it may be how long it would take for the employee to sever his connection with the customers of the business. The issue to be resolved is whether the restraint offers no more than is reasonably necessary to protect legitimate business interests;
- (the relevance of the contract) The Court gives considerable weight to what parties have negotiated and embodied in their contracts. However, contractual consensus cannot be regarded as conclusive even where there is a contractual admission as to reasonableness; and
- (the manner in which the Court will approach section 4) The Court must first determine whether the alleged breach, independently of public policy considerations, will infringe the terms of the restraint. Next, the Court will determine whether the restraint is against public policy.
Justice Davies found that the five year period of restraint was reasonable for reasons including that:
- the nature of the business had an exclusive distributorship arrangement with the US company, which pointed to a valuable business with substantial goodwill to protect;
- Mr Koulouris was aware of the extent of the control that the US company had and that it would insist upon a five year period of restraint;
- Mr Koulouris agreed to the five year period and agreed it was reasonable;
- whereas Mr Koulouris submitted that the benefits he received are not the equivalent of a restraint for five years, the authorities did not suggest an enquiry into the relationship between the period of restraint and any payout received. Rather, the tests are those described in bullet point 4, above;
- both Mr Koulouris and Mr Hunter engaged solicitors to act for them in negotiating the deed; and
- the starting point for the time of any restraint should not be 2006, when Mr Koulouris commenced working separately to the main business. In circumstances where this is not a restraint on a former employee who has left the business and a new employee coming in to take over the role, the appropriate test is the time required for severing the relationship between Mr Koulouris and those clients who would patronise the business after its sale. During the time when Mr Koulouris worked separately to the main business he continued to deal with enquiries from clients and took orders for the main business.