Restraint of Trade Clauses

Having a well constructed restraint of trade clause in an employment contract is extremely important to protect the legitimate interests of an employer and their business.

A restraint of trade clause is when one party, the ‘covenantor’, gives up a freedom that he or she would otherwise enjoy in relation to his or her trade, for the benefit of the other party, the ‘covenantee’.

Restraint of trade clauses are used as a means to prevent departing employees taking clients, confidential information / trade secrets and competing with the business for a certain period and within a certain geographic area after leaving.

At first instance, restraint of trade clauses are void.1 However, a restraint of trade will be valid if it can be shown that it is reasonable. If a Court finds a restraint of trade clause to be unreasonable, it will most likely result in the whole clause being unenforceable.

Cascading clauses are used as a means to provide a number of alternatives in the event that the Court finds a term unreasonable. Unreasonable terms in these clauses are able to be severed, allowing the remainder of the clause to be enforceable.

The following cases highlight the importance of a well constructed restraint of trade clause, and how a standard clause may not be appropriate for all employers and employees.

HRX Holdings Pty Ltd v Pearson [2012] FCAFC 111

In this case, the Federal Court of Australia held that a two (2) year restraint of trade clause was reasonable.

HRX Holdings Pty Ltd (HRX) was a human resources company and was co-founded by Mr Pearson. Mr Pearson was the Director of HRX until he resigned in 2011. The clause in Mr Pearson’s Executive Service Agreement (ESA) restrained him from accepting employment with, or engaging in a business “similar to or competitive with” HRX for a period of two (2) years after the termination of employment.

The restraint clause set out in Mr Pearson’s ESA was negotiated by Mr Pearson and Ms Leslie, the nonexecutive chair and co-founder of HRX. This restraint set out a number of requirements and provided remuneration for Mr Pearson during this period. Both Mr Pearson and Ms Leslie agreed that their employees should be subject to a restraint of trade for either three (3), six (6) or twelve (12) months depending on the nature of their employment. It should be noted that Mr Pearson’s period of restraint was the only one which provided remuneration.

Mr Pearson gave two (2) months written notice of his resignation and proposed to work at another company (Talent2) as one of their most senior executives, in direct competition with HRX. The decision by Mr Pearson to work for Talent2 led to HRX seeking an injunction in the Federal Court restraining Mr Pearson from doing so.

At trial, the primary judge considered a number of matters including the construction of the clause and the reasonableness of the restraint. The primary judge found that the restraint clause was reasonable on the basis:

  • There was considerable negotiation about the restraint;
  • Mr Pearson was provided with significant remuneration during the restraint period;
  • The time period of two (2) years was appropriate in the context of the contractual cycle HRX operated on;
  • Mr Pearson was usually the primary presenter to prospective clients;
  • Mr Pearson’s role in HRX allowed him access to confidential information including techniques and resources that were used to gain and retain clients; and
  • Mr Pearson had the opportunity to seek legal advice on the restraint (pre-commitment), which he did.

OAMPS Insurance Brokers Pty Ltd v Hanna [2010] NSWSC 781

This case demonstrates how an employer successfully restrained an employee by utilising cascading clauses.

Mr Hanna was employed at OAMPS Insurance Brokers Pty Ltd (OAMPS) as an insurance broker from October 1990 – May 2010. He resigned at OAMPS and commenced work at a competitor, Strathearn Insurance Brokers (Strathearn).

At the time Mr Hanna resigned, his position at OAMPS was client director. OAMPS sold insurance policies to clients earning revenue through commission gained on sales.

Mr Hanna was aware of the restraint provision in his employment contract and advised Strathearn that he could not bring clients with him from OAMPS when he commenced work at Strathearn. However, Mr Hanna told his clients if they wanted him to do so he could “look after them” and told them he was commencing work at Strathearn.

The Court held that an employer’s customer relationship is an interest that can support a restraint of trade if the employee is the “face” of the business and has significant personal knowledge or influence over the client.

The restraint set out in Mr Hanna’s employment contract provided that he would not canvass, solicit or deal with any clients of OAMPS that he had dealings with during the two (2) year period prior to his employment ending.

Cascading clauses were used to define the restraint period and restraint area. Set out below is the cascading clause the OAMPS used to define ‘restraint area’.

Restraint Area means:

  1. Australia;
  2. The State or Territory in which you are employed at the date of termination of your employment;
  3. The metropolitan area of the capital city in which you are employed at the date of termination of your employment.’

The restraint period was a maximum period of fifteen (15) months and a minimum of twelve (12) months.

Mr Hanna argued that the clause was void because it was not reasonable in protecting the interests of OAMPS and that it was uncertain. However, the Court found it to be certain despite there being nine (9) different restraint options; each restraint was “separate and independent” and was capable of being severed.

The Court found that a restraint of twelve (12) months was reasonable. This was held to be a reasonable time as the length of OAMPS insurance policies was twelve (12) months. This allowed reasonable time for OAMPS to renew it clients’ insurance policies without Mr Hanna competing for this work at his new employment.

Conclusion

It is important that consideration is taken when determining a restraint of trade clause in an employee’s contract. Employers need to remember that these clauses will only be enforced where the restraint provision is reasonable in protecting the legitimate interest of the employer.

Courts will determine reasonableness by looking at an employees’ seniority, remuneration, access to confidential information / trade secrets and nature, scope and extent of the employee’s dealing with the business’ clientele.