When is a restraint of trade clause not reasonable?

Short Answer

Generally speaking, a restraint of trade clause refers to an instance where one party agrees with another party to restrict a person’s right to carry on their trade or profession. Every case is different; restraint of trade clauses can vary depending on the nature of the agreement between employer and employee and the nature of the business of the employer.

Restraint of trade clauses are usually presumed to be void, but this presumption can be rebutted depending on the circumstances of your case. On a number of occasion, Courts have upheld restraint of trade clauses in favour of employers. If your current or previous employer is seeking to rely upon such a clause, whether it be in your employment contract or within the rules of their organisation, you should seek legal advice to ensure you are not being treated unfairly.

Long Answer:

Contractual provisions in restraint of trade are generally void,[1] but can be enforced in special circumstances where the clause is:

(a)    reasonable as between the parties; and

(b)    not unreasonable in the public interest.[2]

Reasonableness as between the parties is found if, at the date of contract, the restraint clause protects the “legitimate interests of the employer”.[3] For example, a restraint of trade clause may be upheld where it prevents an employee, who has obtained confidential information during their previous employment, from engaging with a competitive business that could use that information.[4]

The onus of proof lays with the party relying on the clause,[5] except where it is alleged the restraint clause is against the public interest, in which case the burden lays solely with the employee.[6]

The surrounding circumstances and facts of a case are considered when determining reasonableness of such a clause.[7]

Example

Recently, the Victorian Supreme Court of Appeal in Just Group Ltd v Peck [2016] VSCA 334 made interesting comments in relation to restraint of trade clauses.

Peck was employed as Chief Financial Officer for Just Group. A restraint of trade clause contained within her contract prevented her from engaging in certain activities for a period of 12-24 months after termination of her employment. After her employment ended, Just Group sought to rely on the clause to prevent Peck from working with Cotton On.

Having considered the circumstances of the specific case, the Appellate Court upheld the majority of the Trial Judge’s findings; the restraint of trade clause was void as it went well beyond that which was reasonable to protect the employer’s legitimate interests. In particular, the Court stated ‘an employer does not have a legitimate interest in protecting itself from competition per se.’[8] The Court took issue with preventing an employee from competing with the employer, without any other special circumstances arising; the employer failed to provide special circumstances to rebut the presumption of invalidity.[9]

The Court made abundantly clear that they will not read down or sever invalid clauses so as to make a new agreement for the parties:

The courts are referees, not players; they are not supposed to waste their time adapting illegal covenants at the instance of those who seek to benefit from the illegality.[10]

Conclusion:

While the Victorian Supreme Court of Appeal demonstrated that restraint of trade clauses in employment contracts are generally construed in favour of employees, it also illustrated how the factual matrix of a particular case will be considered. It is therefore vitally important that you seek legal advice where an employer is attempting to incorporate a restraint of trade clause into your contract, or relying upon such a clause to restrict future employment.

[1] Wallis Nominees (computing) Pty Ltd v Pickett (2013) 45 VR 657 [14].

[2] Just Group Ltd v Peck [2016] VSCA 334 [31].

[3] Just Group Ltd v Peck [2016] VSCA 334 [33] citing Wallis Nominees (computing) Pty Ltd v Pickett (2013) 45 VR 657 [14].

[4] Woolworths Ltd v Olson [2004] NSWCA 372 [67].

[5] Wallis Nominees (computing) Pty Ltd v Pickett (2013) 45 VR 657 [14].

[6] Just Group Ltd v Peck [2016] VSCA 334 [35].

[7] Butt v Long (1953) 88 CLR 476, 487.

[8] Just Group Ltd v Peck [2016] VSCA 334 [49].

[9] Ibid [54].

[10] Ibid [57] citing J D Heydon, The Restraint of Trade Doctrine (Butterworths, 3^rd ed, 2008) 294.