Trade clauses need scrutiny


HR professionals would be all too aware that it can be a challenging time when a valued employee exits the business. This is particularly so where shortly afterwards, the former employee begins working for a direct competitor or even starts up their own business in direct competition.

Unfortunately, this is around the same time lawyers are often called in to sue under, or enforce, a ‘standard’ or poorly drafted restraint of trade or non-solicitation clause that exists as part of the former employment agreement. By then, it is often too late. It is important to get the wording right at the time the particular employee enters into their employment agreement, or at least, prior to the employee exiting the business.

Wording of restraints

Only carefully drafted restraints ensure that an employer’s hard-earned goodwill remains protected once the employment relationship comes to an end. In contrast, standard or poorly drafted restraints are unenforceable and entirely worthless to a former employer.

The starting point to remember is this: HR professionals and employers alike need to keep in mind that the courts will uphold restraint clauses only to the extent that is reasonably necessary to protect the former employer’s legitimate commercial interests.

In making the assessment, the courts will usually look at the restraint clause in terms of the following:

  • The scope of activities restrained after employment has ceased.
  • The geographical coverage of the activities restrained.
  • The scope of duration of the restraint.
  • The certainty of the clause itself.

Past cases

Cases in recent years highlight the importance of getting the wording right to suit the individual circumstances of a particular employee prior to the employment relationship ending, or risk losing the benefit of such clauses altogether.

Sear v Invocare Australia Pty Ltd

A prime example is the case of Sear v Invocare Australia Pty Ltd [2007] WASC 30, where the court held that a broadly drafted restraint clause was wider in its geographical coverage than was reasonably necessary to protect the legitimate commercial interests of the former employer.

The case further confirmed that such clauses are to be construed with reference to the time when the agreement about the restraint was made. As such, employers should regularly review:

  • Restraints to ensure they are still relevant and appropriate to the particular employee.
  • The business’s circumstances.

Northern Tablelands Insurance Brokers v Howell

Another example of a poorly drafted restraint clause was in the case of Northern Tablelands Insurance Brokers v Howell [2009] NSWSC 42, where the clause was held to be invalid for uncertainty where it contained multiple time periods but was unclear as to how the time limits were to operate.

OAMPS Insurance Brokers Ltd v Hanna

However, in OAMPS Insurance Brokers Ltd v Hanna [2010] NSWSC 781 a clause that provided for different distances and time periods of restraint of trade where each clause was severable and independently binding (referred to as a ‘cascading clause’) was held to be reasonable in the circumstances, and therefore enforceable. This case highlights that carefully drafted and unambiguous restraints will be enforceable where the clause restrains the employee only to the extent necessary to protect the employer’s legitimate commercial interests and is reasonable in both its duration and geographical area.

Red Bull Australia Pty Ltd v Stacey

A more recent case of Red Bull Australia Pty Ltd v Stacey [2011] NSWSC 1212 further illustrates a willingness to hold senior employees accountable to employment agreements that contain restraint clauses in appropriate cases, particularly where the senior employees are highly paid. In that case, the court:

  • Granted injunctive relief to prevent two former Red Bull executives working for a competitor, even though the restraint period was due to expire the next month.
  • Stated that the appropriate remedy to ensure the integrity of the restraint was to require the former employees to resign as directors of the new employer until the end of their restraint periods.

The case confirms that courts will uphold well-drafted and enforceable restraint of trade clauses even where there is only a short period before the clause expires.

Preventing problems

  • HR professionals and employers alike need to ensure that each restraint is reasonable in the individual circumstances according to the employee’s position and the nature of the employer’s business.
  • Cascading provisions providing for alternative geographical locations and/or time limits can be adopted on a case-by-case basis in order to protect the employer’s legitimate commercial interests, but only where each is separate and independently binding.
  • As restraint clauses are assessed at the time they are agreed to by the parties, the time to act is now. It is too late once the employment relationship has ended.

 

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Trade clauses need scrutiny


HR professionals would be all too aware that it can be a challenging time when a valued employee exits the business. This is particularly so where shortly afterwards, the former employee begins working for a direct competitor or even starts up their own business in direct competition.

Unfortunately, this is around the same time lawyers are often called in to sue under, or enforce, a ‘standard’ or poorly drafted restraint of trade or non-solicitation clause that exists as part of the former employment agreement. By then, it is often too late. It is important to get the wording right at the time the particular employee enters into their employment agreement, or at least, prior to the employee exiting the business.

Wording of restraints

Only carefully drafted restraints ensure that an employer’s hard-earned goodwill remains protected once the employment relationship comes to an end. In contrast, standard or poorly drafted restraints are unenforceable and entirely worthless to a former employer.

The starting point to remember is this: HR professionals and employers alike need to keep in mind that the courts will uphold restraint clauses only to the extent that is reasonably necessary to protect the former employer’s legitimate commercial interests.

In making the assessment, the courts will usually look at the restraint clause in terms of the following:

  • The scope of activities restrained after employment has ceased.
  • The geographical coverage of the activities restrained.
  • The scope of duration of the restraint.
  • The certainty of the clause itself.

Past cases

Cases in recent years highlight the importance of getting the wording right to suit the individual circumstances of a particular employee prior to the employment relationship ending, or risk losing the benefit of such clauses altogether.

Sear v Invocare Australia Pty Ltd

A prime example is the case of Sear v Invocare Australia Pty Ltd [2007] WASC 30, where the court held that a broadly drafted restraint clause was wider in its geographical coverage than was reasonably necessary to protect the legitimate commercial interests of the former employer.

The case further confirmed that such clauses are to be construed with reference to the time when the agreement about the restraint was made. As such, employers should regularly review:

  • Restraints to ensure they are still relevant and appropriate to the particular employee.
  • The business’s circumstances.

Northern Tablelands Insurance Brokers v Howell

Another example of a poorly drafted restraint clause was in the case of Northern Tablelands Insurance Brokers v Howell [2009] NSWSC 42, where the clause was held to be invalid for uncertainty where it contained multiple time periods but was unclear as to how the time limits were to operate.

OAMPS Insurance Brokers Ltd v Hanna

However, in OAMPS Insurance Brokers Ltd v Hanna [2010] NSWSC 781 a clause that provided for different distances and time periods of restraint of trade where each clause was severable and independently binding (referred to as a ‘cascading clause’) was held to be reasonable in the circumstances, and therefore enforceable. This case highlights that carefully drafted and unambiguous restraints will be enforceable where the clause restrains the employee only to the extent necessary to protect the employer’s legitimate commercial interests and is reasonable in both its duration and geographical area.

Red Bull Australia Pty Ltd v Stacey

A more recent case of Red Bull Australia Pty Ltd v Stacey [2011] NSWSC 1212 further illustrates a willingness to hold senior employees accountable to employment agreements that contain restraint clauses in appropriate cases, particularly where the senior employees are highly paid. In that case, the court:

  • Granted injunctive relief to prevent two former Red Bull executives working for a competitor, even though the restraint period was due to expire the next month.
  • Stated that the appropriate remedy to ensure the integrity of the restraint was to require the former employees to resign as directors of the new employer until the end of their restraint periods.

The case confirms that courts will uphold well-drafted and enforceable restraint of trade clauses even where there is only a short period before the clause expires.

Preventing problems

  • HR professionals and employers alike need to ensure that each restraint is reasonable in the individual circumstances according to the employee’s position and the nature of the employer’s business.
  • Cascading provisions providing for alternative geographical locations and/or time limits can be adopted on a case-by-case basis in order to protect the employer’s legitimate commercial interests, but only where each is separate and independently binding.
  • As restraint clauses are assessed at the time they are agreed to by the parties, the time to act is now. It is too late once the employment relationship has ended.

 

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