Restraints must be reasonable
In order for a restraint to be enforceable, it must be reasonable. In New South Wales, the Restraint of Trade Act 1974 (NSW) also allows a court to "read down" a restraint clause so that it is reasonable.
For a restraint to be reasonable:
- it must be necessary to protect a legitimate business interest;
- it needs to be for a reasonable period of time;
- the geographical area must also be reasonable; and
- consideration is given as to whether the employee has had personal dealings with customers, suppliers, employees etc.
Usually a non-compete clause is a harder type of restraint to enforce than a non-solicitation clause. A non-compete clause is likely to be unreasonable and thus unenforceable where the employee is prevented from engaging in any type of work. It is better if the restraint seeks to prevent the employee from engaging in a particular type of business or with certain competitors.
Tips for drafting effective clauses
Employers should make sure that restraint clauses are properly drafted. Given the critical nature of these clauses to businesses we would recommend advice be taken on the precise wording of such clauses rather than apply a "cookie cutter" approach.
Bearing the need for some individuality in mind typically a restraint clause should include:
- cascading provisions;
- a time period no longer than what is necessary to protect the business interest;
- a geographical area no larger than what is necessary to protect the business interest;
- a limited non-compete clause – these clauses cannot be so broad as to prevent the employee from earning a living; and
- a limited non-solicitation clause – these clauses are more likely to be enforceable where they are limited to those the employee had personal dealings with and ideally within a limited timeframe, for example personal dealings in the last 12 months of the employment.
What happens if a breach occurs?
Enforcing a restraint is a costly exercise and therefore advice should also be sought as to whether the restraint is likely to be enforceable and the remedies available.
You must also be able to demonstrate the damage or loss that has occurred due to the breach of the restraint. Whilst the restraint may be reasonable and enforceable, if the damage or loss is not supported by sufficient evidence then a claim for damages may be unsuccessful.
In the recent case of De Poi Consulting Pty Ltd v D (No 2) [2015] SADC 111, an employee allegedly resigned to study and travel but instead began working for a competitor the next day.
The Court read down the six month restraint to a period of two months and confined the restraint to South Australia, and subsequently held that the employee was in breach of the "watered down" restraint. The employer claimed that the employee owed damages for the loss its business suffered from the breach.
However, the Court held that whilst the employer had a legitimate business interest to protect and the employee had breached her contractual obligations, the employer could not quantify the loss and therefore damages were not awarded.
A delay in enforcing the restraint may also lead to a decision against the employer.
In the case of Fairfax Media Management Pty Ltd v Harrison [2014] NSWSC 470 , Fairfax sought to enforce a restraint to prevent an executive from working with Yahoo7.
Yahoo7 wrote to Fairfax proposing that Mr Harrison commence work during his restraint period. Fairfax did not respond to this letter for three weeks and then did not commence proceedings for a further week.
The Court found that the delay was substantial because it meant that the injunction sought by Fairfax would only last for a period of seven weeks and as such, decided not to enforce the restraint because it had become of little utility.
If you suspect a breach has occurred then you must act immediately – a delayed response may mean the court rules that relief is not needed even where the restraint is reasonable and enforceable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
