Confidentiality and Post Employment Obligations

Can an Employee be Restrained for 10 Years?

Surprising as it may seem, a Western Australian Court has accepted that a 10 year restraint may in fact be enforceable. An engineer with highly specialised skills has temporarily been barred from working with any competitors in Western Australia after the Western Australia Supreme Court determined that a 10 year restraint clause was reasonable, at least until the Court has the benefit of having a full hearing into the matter.

The defendant, Mr Cook, sold his stake in Matchtec Hydraulics in 2014, but remained an employee until his resignation in June 2016. The company was sold for $650,000 with $588,700 apportioned to goodwill. The defendant commenced work with a competing hydraulic engineering business which performed the same work in July 2016.

The new owners of Matchtec Hydraulic accused Mr Cook of soliciting customers and making disparaging remarks about the business, and the nature and quality of the products and its services. Mr Cook denied claims he had approached any of his previous customers and stated that the industry was very competitive with customers showing little loyalty. He further explained that customers awarded work according to price, reputation and the service provided.

Mr Cook admitted to paying little attention to the terms of the restraint of trade clause when accepting them, nor did he obtain independent legal advice because he had planned to live in the UK after entering the deed of restraint. He also asserted that he was not qualified to perform work outside of the hydraulic engineering industry and that a 10 year restraint was unreasonable. Nevertheless, the Court rejected Mr Cook’s claims he was unable to earn a living other than by working in the industry due to the fact he resigned prior to being approached by his new employer. Justice Tottle inferred that at the time of resignation Mr Cook must have had a degree of confidence in his ability to earn a living by some means other than in the service, repair and manufacture of hydraulic cylinders.

The common law position in Western Australia considers all contracts in restraint of trade void unless the restraint is reasonable, with the onus on the party wishing to enforce the restraint to prove reasonableness. A restraint of trade will be considered unreasonable if it provides greater protection than that which is reasonably required to give adequate protection to the person for whose benefit the restraint is imposed. In this regard, His Honour Paul Tottle expressed reservation about the reasonableness of the 10-year period, stating that it was on the other edge of what might be considered acceptable. However, Justice Tottle noted that injunctive relief was the most appropriate remedy because refusing such a remedy would deprive Devil Dog of a potentially valid contractual restraint, which formed part of the agreement. His Honour also noted that it would be difficult to pursue Mr Cook and recover damages if he moved outside of the Court’s jurisdiction. In light of the above, His Honour’s provisional assessment concluded that a prima facie case had been made out. The matter is set to be heard in April 2017 where the reasonableness of the 10 year restraint will be tested in full.

While commonly restraints of trade clauses are dismissed by most as unenforceable, this decision demonstrates that the Courts are prepared to enforce properly crafted restraint of trade clauses, particularly those imposed upon the vendor of a business. Accordingly, it is of paramount importance that restraint clauses are drafted with regard to the particular facts and circumstances of the matter and the relevant jurisdiction. It is also imperative to understand that in NSW, as a result of the Restraint of Trade Act 1976 (NSW), NSW Courts can read down a restraint clause. This means that even if the restraint period is unreasonable, the Court has the ability to decide for itself what would be reasonable and amend the clause accordingly.

In light of the above, employers should consider a number of the following to steps to protect their business interests:

  • Review current employment contracts to ensure they are up to date and include reasonable confidentiality and restraints of trade clauses, specifically for employees who have been promoted within your business or have been with your business for a long time;
  • Ensure the restraint clause sufficiently protects the company’s legitimate interests and are tailored to the circumstances;
  • Conduct exit interviews with employees and remind them of their post-employment obligations;
  • Write to high risk departing employees reminding them of their post-employment contractual obligations; and
  • If you are concerned whether an employee may be breaching their post-employment obligations, act quickly to put the employee on notice that the conduct is unacceptable and seek appropriate legal advice.

If you wish to discuss any aspect of this article or require specialist advice or assistance in relation to an employment law matter, please do not hesitate to contact us.

This alert is not intended to constitute, and should not be treated as, legal advice.

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