Are restraint of trade clauses in employment contracts valid?

The validity of a restraint of trade depends on the facts of the specific clause(s) in question.

A court begins with the assumption that a restraint of trade clause is unenforceable as a matter of public policy. As stated by the High Court of Australia in Buckley v Tutty (1971) 125 CLR 353 at 380:

“Unreasonable restraints are unenforceable as it is contrary to public welfare that a person should be unreasonably prevented from earning a living in whichever lawful way he chooses and that the public should be unlawfully deprived of his services.”

It is then on the party seeking to enforce the clause to prove that it is valid because it is reasonable. A restraint will only be reasonable if it satisfies two tests.

Firstly, the restraint must be reasonable in relation to the interests of the employer and employee, in that it must seek to protect a legitimate interest of the employer. Simply protecting against competition is not sufficient. Instead, examples of a legitimate interest include:

• where the employee has access to confidential information that goes beyond mere ‘know-how’ and they may be in a position to use that knowledge to the employer’s detriment;
• protection of trade secrets and business goodwill; and
• the employee’s work involves personal contact with the employer’s customers, and they may be able to use that connection to entice those customers away.

Secondly, the restraint must be reasonably in the public interest. This means that the scope of the restraint in regards to its duration, area of effect and nature of activities restrained must be reasonable.

“I have a restraint of trade clause in my contract, but a former client has approached me. If they want to retain me, will I be in breach of my restraint of trade clause?”

Depending on the circumstances of your conversation with the former client, you may be in breach of any clause that prevents you from ‘soliciting’ former clients.

There are two leading cases in relation to this question which suggest that if a former client has already determined that he wants to retain you, then you have not solicited their business. However, if the client approaches you and you engage in any conduct that influences their decision to retain you then you may have solicited them.

In Barrett v Ecco Personnel Pty Ltd [1998] NSWSC 545 Mr Barrett was contacted by an officer of Nestle, days after leaving employment at Ecco, he was then invited by the officer to submit a proposal as an industrial consultant. Mr Barrett had submitted the proposal through his own personnel agency and subsequently attended a meeting with Nestle in which they agreed to go ahead with the proposal.

Mr Barrett contended that he had not canvassed, solicited or enticed any client away from Ecco Personnel as he was invited by Nestle to submit the proposal; he did not make the initial contact. At first instance it was held that although Nestle provided Mr Barrett with the ‘window of opportunity’ it was Mr Barrett who solicited and enticed Nestle through his proposal.

On appeal Stein JA referred to Sweeney v Astle [1923] NZLR 1198, in which Stout CJ had noted that `solicit’ was a common English word, and in its simplified form meant `to ask’. However Stein JA stated that other meanings of the word ‘solicit’ included `to call for’ `to make request’, `to petition’, `to entreat’, `to persuade’.

Stein JA concluded that Nestle’s invitation was the ‘catalyst or trigger for the solicitation by the appellant’ and that this did not ‘make the appellant any less the mover for the action happening.’ As a result, Mr Barrett had solicited the business of Nestle by submitting his proposal to them, despite not having made the initial contact.

In Planet Fitness Pty Ltd v Brooke Dunlop & Ors [2021] NSWSC 1425, Ms Dunlop had been a personal trainer engaged as an independent contractor and was subject to a restraint clause prohibiting her from directly or indirectly soliciting, canvassing or securing the custom of any client. She subsequently entered into agreements with other gyms in the Newcastle area, who offered discounted membership rates to people she had previously trained. She had a significant number of these former clients on Facebook and she made numerous Facebook posts outlining the deals offered by the new gyms.

In the interlocutory proceedings, Justice White acknowledged that there was a prima facie case to be heard that Ms Dunlop had solicited, canvased or enticed former clients. However, he stated that ‘as a whole, the clause is a restraint against endeavouring to attract, or achieving the attraction of, custom of the former clients of the first defendant, after her contract with the plaintiff had been terminated.’ On this interpretation, he found that Ms Dunlop was not restrained from providing services to former clients who ‘of his or her own volition wished to continue to use the first defendant as his or her personal trainer.’ Justice White made orders only to prevent Ms Dunlop from posting further messages on Facebook, but not from providing services to her former clients.