Enforc­ing Trade Restraints — Two year restraint can be reasonable

Introduction

Employ­ers com­mon­ly include restraint of trade claus­es in con­tracts of employ­ment to seek to pro­tect them­selves from their employ­ees poach­ing their clients or staff, or for work­ing for a competitor.

At com­mon law, restraints are con­trary to pub­lic pol­i­cy and are there­fore pri­ma facie void, unless they can be shown to be rea­son­ably nec­es­sary to pro­tect the legit­i­mate inter­ests of the per­son seek­ing to enforce them.

The enforce­ment of restraints is prob­lem­at­ic giv­en the fact that deci­sions in this area are heav­i­ly influ­enced by the unique cir­cum­stances of each case. The out­come of a case may depend upon a court’s per­cep­tion of the threat to the busi­ness posed by the for­mer employ­ee and whether the restraints in ques­tion were con­fined to what was rea­son­ably nec­es­sary to pro­tect the legit­i­mate busi­ness inter­ests of the per­son seek­ing pro­tec­tion. How long a restraint may be enforced for, is a par­tic­u­lar­ly elu­sive mat­ter to pre­dict, and few restraints in the employ­ment con­text are enforced beyond 12 months. How­ev­er a recent deci­sion in the Fed­er­al Court sug­gests that there are some cir­cum­stances in which a restraint of 24 months may be enforced.

HRX Hold­ings Pty Ltd v Pear­son [2012] FCA 161

Brent Pear­son was a direc­tor and employ­ee of HRX Hold­ings Pty Ltd (‘HRX’), a Human Resources out­sourc­ing com­pa­ny. He was also a co-founder of the busi­ness with Kat­ri­na Leslie. He was employed under a for­mal writ­ten con­tract which includ­ed a pro­vi­sion restrain­ing him from accept­ing employ­ment or engag­ing in a busi­ness ​“sim­i­lar to or com­pet­i­tive with” HRX for a peri­od of two years from ces­sa­tion of employ­ment with HRX.

The Agree­ment also gave Mr Pear­son an 8% stake in the com­pa­ny and an arrange­ment for the pay­ment of his past-aver­age remu­ner­a­tion for all but three months of the restraint peri­od. The defen­dant resigned from his direc­tor­ship in July 2011 and sought to take employ­ment at a senior lev­el with one of HRX’s major com­peti­tors. An injunc­tion was grant­ed enforc­ing the two-year restraint pro­vi­sion on the basis that the restraints were rea­son­able in the circumstances.

First Issue – Was the scope of the restraint was reasonable?

In deter­min­ing the valid­i­ty of the restraint, Jus­tice Buchanan con­sid­ered the rea­son­able­ness of the scope of the restraint. The Agree­ment defined a restrained busi­ness as ​“a busi­ness or oper­a­tion sim­i­lar to or com­pet­i­tive with the busi­ness of a group com­pa­ny”.

The defen­dant argued that the words ​‘sim­i­lar to’ were imper­mis­si­bly wide because they were not con­fined to present or poten­tial com­pe­ti­tion and were not sub­ject to any stat­ed geo­graph­i­cal lim­i­ta­tion, and that no such lim­its should be implied. The defen­dant also argued that the restraint was imper­mis­si­bly wide because it was not lim­it­ed to the legit­i­mate and rea­son­able pro­tec­tion of HRX.

How­ev­er his hon­our held that the scope of the restraint was not unrea­son­able, not­ing that the evi­dent pur­pose of the clause was not to unnec­es­sar­i­ly restrain the legit­i­mate future of the defen­dant, but rather to pro­vide rea­son­able and legit­i­mate pro­tec­tion to HRX Hold­ings in areas in which the busi­ness was operating.

Sec­ond Issue – Was the dura­tion of the restraint reasonable?

Jus­tice Buchanan also con­sid­ered the rea­son­able­ness of the two-year dura­tion of the restraint and found that a two-year restraint was rea­son­able in the cir­cum­stances in question. 

He not­ed that the dura­tion of the post-employ­ment restraint had been the sub­ject of close nego­ti­a­tion. The issuance of shares and the arrange­ment for pay­ment to the defen­dant for all but three months of the restraint peri­od, were pro­vi­sions includ­ed in the Exec­u­tive Ser­vice Agree­ment to specif­i­cal­ly address the restraint period.

He held there was sep­a­rate con­sid­er­a­tion for the restraint peri­od and that it was ​‘clear­ly valu­able consideration’.

His hon­our also found that because HRX typ­i­cal­ly entered into two or three year con­tracts with its clients, a peri­od of two years rea­son­ably accom­mo­dat­ed HRX’s con­trac­tu­al cycle and was rea­son­able in pre­vent­ing the defen­dant from intrud­ing on HRX’s efforts to renew or extend exist­ing contracts. 

It is also inter­est­ing to note that no oth­er HRX exec­u­tive had a pro­vi­sion in their employ­ment which pro­vid­ed for pay­ment dur­ing the restraint period. 

Third Issue – Is the Restraint Act incon­sis­tent with the Fair Work Act?

Jus­tice Buchanan also not­ed that if the above con­clu­sions as to enforce­abil­i­ty were incor­rect, an appli­ca­tion of the (NSW) Restraints of Trade Act would lead to an iden­ti­cal con­clu­sion. The Restraint of Trade Act allows a restraint to be read down in NSW, to make it enforce­able in cir­cum­stances where it might oth­er­wise fail because it is too broad, (pro­vid­ed that a rea­son­able attempt had been made when draft­ing it in the first place).

The defen­dant also argued that s26 of the Fair Work Act has the effect of exclud­ing all state indus­tri­al laws thus mak­ing the Restraint of Trade Act inop­er­a­tive. How­ev­er Jus­tice Buchanan held that the Restraints Act relat­ed to the enforce­ment of con­tracts of employ­ment which are clas­si­fied as a ​‘non-exclud­ed’ mat­ter under s27 of the Fair Work Act, and there­fore not dis­placed by the Fair Work Act. His hon­our also held that s26 would also not apply as the Restraint of Trade Act was not an ​“indus­tri­al law”. 

Les­son for employers

Gen­er­al­ly a two-year restraint pro­vi­sion will be regard­ed as extend­ing beyond what is rea­son­ably nec­es­sary to pro­tect the legit­i­mate busi­ness inter­ests of the employ­er. How­ev­er in some cir­cum­stances, includ­ing ded­i­cat­ed con­sid­er­a­tion for the restraint, and a two year con­tract cycle, courts are pre­pared to look at enforc­ing restraints for peri­ods exceed­ing a year.