30/03/2010

Embedded in many employment agreements and sale of business agreements is a restraint on the employee or vendor of the business.  The Supreme Court has recently considered the enforceability of a post-termination restraint in regard to a solicitor leaving a country law firm.  In this case the court upheld the validity of the restraint.

We are often called on to draft or advise on the effect of a restraint clause in regard to employment agreements or sale of business agreements.  Consideration should always be given to the particular facts and the interest that is to be protected by the restraint as not all restraints will be enforceable.

In regard to employment agreements for senior staff, the restraint often deals with two distinct areas following the employee’s termination.  First, it purports to restrain the employee from either “soliciting” or “acting” for clients of the former employer for a defined period of time.  Second, it purports to restrain the employee from “enticing” other employees to leave the former employer for a defined period of time.  The classic example is where the employee is terminated and sets up a new business in competition with the former employer and poaches the former employer’s staff and its clients.

In New South Wales, a restraint of trade is governed by the common law and the Restraints of Trade Act 1976 (NSW).  A restraint of trade will only be valid to the extent that is reasonably necessary to protect the legitimate interest of the former employer’s client relationship.

A restraint may be challenged by the former employee if it is wider than is reasonably necessary to protect the employer’s legitimate interest.  The restraint is often challenged as to the number of clients that it applies to and/or the length of time or geographical area of the restraint.

The Supreme Court of New South Wales recently considered a post-employment restraint in the case of Stacks/Taree v Marshall [No.2] [2010] NSWSC 77 and held that a restraint of 12 months was reasonable but reading down the restraint to only apply to clients that the employee had contact with during the last 12 months of his employment.  In addition, the court held that the restraint prohibiting the employee from engaging in “competitive activity” was not enforceable because it was a restraint against mere competition.

In its reasons, the court stated that:

“The question of validity of a covenant in restraint of trade … is not really a question of law.  Decided cases state the relevant principles, and may provide useful, indeed valuable, guidance … but the validity of a covenant in restraint of trade is to be assessed having regard to the terms of the particular covenant and the facts of the particular case”.

Accordingly, there is no magical combination of words that can be used in every circumstance and therefore a restraint of trade needs to be tailored to each case.

If you have any questions with regard to restraints of trade, please contact David Nicoll of TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.