Factual Background. The defendant, Mr Palmer, was employed by the plaintiff, Southern Cross Computer Systems Pty Ltd, since May 2001. Prior to 2016, the defendant owned 40 per cent of the shares in the plaintiff. In June 2016, the defendant sold his shares to the second plaintiff pursuant to a share sale and purchase agreement. Pursuant to the agreement, the plaintiff paid the defendant $3.5 million in consideration for the defendant's shares. The agreement also provided for the defendant to continue on as an employee of the plaintiff for one year and to be subject to a restraint of trade clause.
The relevant clause provided, "During the Restraint Period, [the defendant] must not … carry on, engage in or have any involvement in the Restricted Business." The Restraint Period was for a period of up to four years from the completion date of the agreement. The agreement defined "Restricted Business" as "any business which is competitive with, or likely to be competitive with, the Business at the relevant time during the Restraint Period" and "Business" as "the business of IT procurement and associated IT managed services carried on by the Company".
The plaintiff commenced proceedings in the Supreme Court of Victoria against the defendant in June 2017. For several months prior, the defendant had been providing services to a direct competitor of the plaintiff for one day per week and had been receiving remuneration of approximately $5,000 per month from the competitor.
Justice McDonald was required to consider whether the restraint of trade clause operated beyond the scope of the plaintiff's business as at the completion date and, if so, whether the restraint clause was unenforceable as an unreasonable restraint of trade.
Legal Background. Australian courts will enforce a contractual restraint of trade clause only when satisfied that the restraint is both reasonable and necessary to protect the legitimate business interests or goodwill (meaning ongoing relationships with clients and suppliers) of the employer or company. This involves establishing whether the restraint was reasonable at the time the contract was entered into.
There are two types of restraint of trade clauses: post-employment restraints and post-transaction restraints. Australian courts are more willing to enforce the latter type of restraint clauses. The main reason for this is that post-transaction restraints can be properly regarded as facilitating trade and commerce, whereas post-employment restraints restrict trade and commerce.
Decision. The Court held that the four-year Restraint Period in the post-transaction restraint was reasonable for four reasons. First and foremost, the plaintiff paid a "substantial amount of consideration" in return for the terms of the agreement, including the restraints imposed on the defendant. Second, the defendant had worked for the plaintiff since 2001 and was designated in the agreement as a "Key Employee". He had a significant degree of knowledge of the plaintiff's customers. Third, the Restraint Period was a term of the agreement entered into freely by the defendant. Fourth, although the Restraint Period operated for four years, the agreement provided for the defendant to continue working for the Company for one year of the Restraint Period (up until June 2017). The Court imposed a four-year injunction operative until June 2020 restraining the defendant from having any involvement with the competitor.
The plaintiff also sought two more orders: First, an order restraining the defendant from soliciting the plaintiff's employees as at the completion date from leaving their employment with the company. Second, an order restraining the defendant from soliciting any of the plaintiff's customers as at the completion date or at any date during the 12-month period prior to the completion date with a view to obtaining the business of any customer in the competitor's business. However, Justice McDonald refused to grant the proposed orders without first being provided with a list of relevant customers.
Lessons for Employers. Unlike post-employment restraints, post-transaction restraints are not limited in the duration of the restraint which can be agreed to. It is relatively rare for Australian courts to intervene and consider a post-transaction restraint to be unreasonable and unenforceable. Generally, the courts prefer to leave it to the parties to agree to what is reasonable. In this case, the Court was persuaded by the fact that the parties had come to commercial agreement, and that a "substantial amount of consideration" was paid by the plaintiff to the defendant in return for the terms of the agreement, including the restraint of trade clause.