Two recent New South Wales Court of Appeal decisions suggest that employers can rely on well-drafted restraint clauses to prevent former employees from soliciting clients and competing against them.

The cases of Ross & Anor v IceTV [2010] NSWCA 272 (Ross & Anor v IceTV) and Hanna v OAMPS Insurance Brokers Ltd (ACN 005 543 920) [2010] NSWCA 267 (Hanna v OAMPS Insurance Brokers) can be used to support the enforceability of a restraint clause provided:

  • the restraint clause is not against public policy because it is reasonable in the circumstances, going no further than is necessary to protect the former employer's legitimate business interests; and
  • the restraint clause is not uncertain. In particular, where a restraint clause contains cascading provisions providing for alternative periods of time or geographical areas in which the employee is to be restrained, the clause makes clear that each provision can be read as a separate and independent provision.

There is no accepted legal test as to the reasonableness of a restraint clause. Rather, the reasonableness of a restraint clause should be assessed in the individual circumstances and in the context of the time at which the restraint clause was entered into. In particular, in determining whether a restraint clause is reasonable and enforceable, courts will take into account:

  • the former employee's seniority and position within the former employer's organisation;
  • the former employee's knowledge of the former employer's confidential information;
  • the potential detriment to the former employer if the former employee competed with it; and
  • the actual drafting of the clause itself, with particular reference to its certainty (in other words, its clarity).

Ross & Anor v IceTV

In Ross & Anor v IceTV, the New South Wales Court of Appeal held it was reasonable to enforce a restraint clause restraining two senior executives for a period of 12 months from competing with their former employer, which distributed an electronic program guide.

Given the senior executives held very senior roles in a very small organisation, had exercised substantial control over the business, were exposed to and involved in high level negotiations with customers and potential customers, had developed relationships with customers and had direct knowledge of the business' technology and pricing systems, 12 months was found to be a reasonable period of restraint.

Hanna v OAMPS Insurance Brokers

In Hanna v OAMPS Insurance Brokers, a 12 month restraint period for a senior insurance broker with 20 years' service was deemed reasonably necessary by the New South Wales Court of Appeal to protect the legitimate interests of the former employer (an insurance brokerage firm). This was because the insurance broker had strong connections with the clients of the former employer and the former employer renewed its clients' insurance contracts only once in a 12 month period.

The fact that the restraint clause in question included cascading provisions providing for various restraint periods and restricted geographical areas did not void the clause for uncertainty. Rather, the Court found that the various restraint periods and restricted geographical areas were part of separate and independent provisions that could all be understood and complied with without breaching any other provisions.

Conclusion

While it is important to note that these cases were determined in New South Wales where the Restraints of Trade Act 1976 (NSW) applies to restraint of trade clauses, the principles discussed in the cases otherwise apply across all Australian jurisdictions.

In order to protect legitimate business interests, such as client relationships, employers should ensure a reasonable restraint clause is incorporated into their employment contracts, particularly in relation to senior employees with client relationships and knowledge of the employer's confidential and sensitive business information.

When incorporating restraint clauses into employment contracts, employers should take the time to ensure that each restraint is reasonable in the circumstances according to the employee's position and the nature of the employer's business, and where it is difficult to ascertain what is reasonable, employers can adopt cascading provisions, provided each is severable and independently binding.