Overview of the restraint of trade doctrine

1.

The starting point for all restraint of trade clauses is that they are void and unenforceable unless it
can be shown that the restraint is no wider than is necessary to protect the reasonable interests of
the parties.

2.

To be enforceable, a restraint must therefore:

(a)

protect a legitimate interest of an employer; and

(b)

be no wider than is necessary to protect that interest.

3.

The burden of proving a restraint is reasonable and therefore enforceable rests on the party seeking
to enforce it (ie an employer).

4.

The reasonableness of the restraint will be assessed by the Court at the time the restraint is entered
into (ie the date of execution), not at the point in time when it is enforced. Therefore, developments
which occur after execution, provided they were not reasonably foreseeable at the time of
contracting, will be irrelevant to the question of reasonableness in any enforcement proceedings.

What is a legitimate interest?

5.

The list of legitimate interests capable of protection is non-exhaustive. However, the generally
accepted types of protectable interest fall into two broad categories:
(a)

trade secrets/confidential information; and

(b)

customer connections.

Confidential information

6.

Where information is not in the public domain, is not trivial and an employer has taken steps to keep
it confidential, the law does permit restraints which limit the former employees ability to use and
disclose that information once their employment is terminated.

7.

The factors a court will look to in assessing whether a restraint regarding the use and disclosure of
confidential information is reasonable includes:

(a)

how many people within an organisation have access;

(b)

how easy it is to acquire the information; and

(c)

the steps an employer took to maintain the security of the information.

8.

Information not capable of protection through a restraint clause includes information which is
commonly known or relating to general methods of doing business.

9.

As a start point, the nature of the information expressed in usual definitions "cover the field" of the
types of information a senior employee of an employer would have access to and the type of
information that may be protected through a restraint.

10.

However there may be employees who, by virtue of their role with an employer, will come into contact
with all the information which is captured by broader definitions.

11.

As such, the "covering the field" approach should be viewed with a degree of caution. A court will
always look to the specific facts surrounding the terminated employee's employment, their role, their
access to information and the nature of the information which is reasonably capable of coming to
their attention during the course of employment when deciding reasonableness.

12.

A court will do this to look to the legitimacy of the interest being protected by the confidentiality
restraint. Therefore it may be appropriate to tailor the definitions to suit the information which can
reasonably be capable of coming to that employee's attention during their employment. Doing this
helps support enforcement of the restraint as an employer can draw direct links between the role of
the employee and the information which it is seeking to protect.

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13.

Approaching the issue this way will improve an employer's position in possible enforcement
proceedings as opposed to the "one size fits all" approach to restraints of trade.

Customer connections

14.

An employer can protect against a former employee using or taking advantage of relationships they
have built up during the course of their employment. The relationship must be sufficiently strong so
that the employee had influence over the customers.

15.

Therefore it is not enough for the employee to simply have contact with customers. There must be
some element in the employee-client relationship that causes clients to rely on the employee to the
exclusion of other personnel of an employer.

16.

Courts have regularly enforced client connection restraints where the relationship can be said to one
where the employee can control the client's business as it comes to an employer.

17.

Drafting should be designed to be sufficiently broad enough to capture a range of contacts while at
the same time linking this to the employee's employment. In this way, it is a more reasonable
argument to assert that a clause does not go further than that which is necessary to protect an
employer from client solicitation as it only relates to those clients which the employee was exposed
to, and had an impact upon, in a business context.

Competition
18.

A former employer cannot restrain with a view to minimising competition. However, what the law does
permit is a restraint designed to:
(a)

prepare an employer for competition in the post termination period; and

(b)

prepare, induct and train a suitable alternative employee to take on the role of the restrained
employee.

19.

It is for this reason that we have reduced the period of non-competition restraints to 6 months from
the date of termination. However, a longer restraint may be reasonable in circumstances where an
employer can draw out the above 2 criteria as justifying such a restraint.

20.

In assessing whether a lengthy restraint is reasonable, an analysis of the employee's role within an
employer's business will be critical. For instance, a senior member of staff undertaking complex tasks
may justify a 12 month no-competition restraint as it would be particularly onerous to prepare a
suitable alternative to take on this role. Contrast this to a typical "rank and file" employee who, after a
usual period of probation (ie 3 6 months), is properly suited to the role and can be expected to
perform in that role with the usual levels of supervision within an employer's business.

21.

From the examples above, we can see that in the senior employee example, an employer is under a
handicap warranting the restraint of the former employee to allow for the employer to prepare and
train a replacement. In the latter example, a 12 month restraint would be unreasonable as it goes
further than is necessary to protect the legitimate interests of an employer in training and find a
replacement employee.

22.

Provided an employer can point to clear reasons for the length of its restraint, a longer nocompetition clause may be reasonable.

Other factors going to reasonableness

Consideration

23.

Additional amounts can be paid to the restrained employee at the time of execution of their
agreement.

24.

A number of decisions have enforced restraint clauses in circumstances where an additional amount
is paid to an employee to observe its terms.

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25.

Courts approve of this type of conduct on the part of employers as it covers the concerns Courts
have about an employee being unreasonably restrained from earning a living after being terminated.
Therefore, paying an additional amount in consideration for entering into the restraint reinforces the
reasonableness of its enforcement on behalf of the employer.

26.

The criteria a Court will look for is that a reasonable amount has been provided for entering into the
restraint.

27.

Despite these comments, it is not necessary to have an amount in consideration for entering into a
restraint. However, it is a factor going towards reasonableness and will go a long way in establishing
an argument that the restraint is enforceable.

Severability

28.

Clauses which are separate, independent and cascading allows a court to read down a clause
without declaring the entire clause void or unenforceable. As such cascading clauses are able to be
struck out and the remaining clauses still have effect.

29.

A clause such as this allows a Court, in circumstances were it believes that certain aspects of the
restraint are unenforceable, to remove the infringing clause and leave the other restraints intact. This
is a strategic way of drafting to avoid a total rejection of a restraint clause on the grounds that it is
unreasonable.

30.

Contrasting the severability of this clause to the current restraint contained in a general and broad
restraint, illustrates that under that clause, if it were found to be unreasonable, a Court would have no
choice but to rule the whole clause void. This means that there would be no contractual protection for
an employer in the post termination period.

31.

However with a severable clause, even if a Court doesnt agree with one type of restraint, there is still
the possibility that some form of protection may survive judicial scrutiny therefore maintaining a
degree of protection for an employer. This is the 'contingency' protection that a severable clause
provides and it is for that reason that it has been included in the Deed.

Drafting and layout

32.

A relevant, but not determinative factor towards assessing reasonableness is whether the restraint
clause is set out in a transparent and understandable manner.

33.

An employer's restraint clause which is located at the back of the employment contract with no white
space and the acknowledgements are buried within the text will not find favour with a Court. A Court
would criticise this drafting as it would be open to the former employee to allege that they did not
understand or realise the scope of the restraint due to its drafting.