Just Group Ltd v Peck [2016] VSC 614

In Just Group Ltd v Peck [2016] VSC 614, the Victorian Supreme Court refused to enforce a restraint clause in the employment contract of Just Group Limited’s (JGL) former CFO, who defected to major competitor Cotton On, five months after joining JGL.

The restraint clause prevented the CFO from engaging in any activity ‘which is the same as, or similar to any part of’ JGL’s business in Australia and New Zealand for a period of 24 months. The contract also provided the option for the court to enforce narrower constraints. Justice McDonald found that this restraint clause was unreasonable as it would ultimately prevent the CFO from working for businesses that did not compete against JGL in Australia and New Zealand.

The restraint clause also prevented the CFO from engaging with a list of 50 of JGL’s competitors ‘in any activity … for or on behalf of any of the entities operating the brands listed’. Justice McDonald also found this restraint to be too broad and unreasonable, as it would prevent the CFO from working with businesses that were in the list of 50, but in fact did not directly compete with JGL. The way the list was drafted did not allow the court to read the list as 50 separate restraints, which could have allowed JGL to prevent the CFO from working at Cotton On, but not from working for other, less directly competing businesses.

The contract also imposed a probationary period of six months, during which JGL could terminate the CFO’s employment by giving one month’s notice. The court found this unreasonable, as the restraint period was purportedly binding on the CFO for between 12 and 24 months, yet JGL had a contractual ability to terminate the CFO’s employment by giving one month’s notice within the probationary period.

This case, which is on appeal, reinforces the general position that restraints are typically unenforceable at common law. Despite this, restraints have been enforced in a number of cases this year (for example, we acted for BGC Partners (Australia) Pty Ltd to successfully restrain a broker from starting work with a competitor for 9 months). Employers should not only ensure that restraint clauses are carefully drafted, but that all provisions of the contract are reasonable and consistent, which was not the case with the notice clause in Just Group Ltd v Peck.

Employers should be careful not to make restraint clauses too broad or unreasonably restrictive on an employee’s ability to obtain other employment, otherwise courts will deem them unenforceable. It must be remembered that it is the employer that will be required to prove that the restraint goes no further than is reasonably necessary to protect the employer’s business interests. Whilst NSW employers may be able to rely on the Restraints of Trade Act 1976 (which empowers the Supreme Court to read down a restraint that would otherwise be invalid), the courts will not re-write poorly drafted restraints.