The starting point is that restraint of trade clauses are prima facie invalid because they infringe public policy, which holds, quite understandably, that a person should not be able to stand in the way of another person earning a living.
However, under the Restraints of Trade Act 1976 (NSW), a restraint clause will not be invalid if it was reasonable in all the circumstances at the time that it was made.
When deciding the validity of a restraint clause, the Court will ask whether the person seeking to impose the restraint (usually an employer or the incoming purchaser of a business) has a legitimate interest to protect and whether the restraint amounts to reasonable protection of that interest.
Legitimate interests include confidential information, client lists, secret operating procedures, formulae and the like. Legitimate interests are valuable. They can include an employer’s connection with his clients.
In a recent Victorian case, an employee had been seconded to one of his employer’s key clients. After a period, he resigned and took up a job with the client. The employer commenced proceedings to enforce the restraint clause, which prevented the employee from providing services to any former client for a period of 12 months after leaving his employment. The employer argued that its legitimate interest was the investment in their employee’s training and that the purpose of the restraint clause was to ensure that its employees did not use secondments as an opportunity to gain alternative employment. The Court found that the employer’s customer connection was capable of protection but such protection was only afforded where employees had achieved a position such that they had the practical ability to control their employer’s customers as if those customers were their own. The Court did not consider that the seconded employee fell into this category.
In determining whether restraint clauses are reasonable, the Court will consider various matters including the negotiation process, the bargaining position of the parties, the nature of the employer’s business, whether consideration was given for the restraint and the duration of the restraint and geographical area.
Legal proceedings should never be commenced without a great deal of analysis and consideration. In the case of restraint clauses, analysis of the legitimacy of the interest being protected and the reasonableness of the restraint will be critical. The employment team at Everingham Solomons can help with that analysis because Helping You is Our Business.
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