• Australia: Supreme Court Upholds Validity of a Six-Month Restraint to Prevent Senior Executive Commencing Employment with Competitor
  • October 25, 2016 | Author: Adam Salter
  • Law Firm: Jones Day - Sydney, New South Wales Office
  • The Supreme Court of New South Wales recently considered an application for an interlocutory injunction by an employer who sought to prevent an employee commencing employment with a competitor company by relying on a restraint clause in his contract of employment.

    The first defendant, Mr Guy, was employed by the plaintiff, DP World Sydney Ltd ("DPW"). On April 28, 2016, pursuant to his employment contract, Mr Guy gave notice that he had accepted a position with a competitor company. In accordance with the termination clause (clause 17), Mr Guy was required to stay at home during the three-month notice period ("gardening leave") but remain contactable and available to work. Mr Guy was informed that he would remain an employee until the notice period had elapsed and termination of his employment was effective (July 28, 2016). Thereafter, the post-employment restraint would commence for three months. In response, Mr Guy argued that the gardening leave should count toward the three-month restraint period, so that he was entitled to commence employment on July 29, 2016. DPW sought an interlocutory injunction to restrain Mr Guy from commencing employment with the competitor until October 27, 2016.

    At common law, in order for a restraint to be enforced, it must be: (i) reasonable, having regard to the interests of the parties; and (ii) not unreasonable in the public interest. A restraint of trade is "reasonable" if the employer has a legitimate protectable interest and the restraint does no more than is reasonably necessary for the protection of that interest. A "legitimate protectable interest" may include an interest in trade secrets, confidential information, goodwill, and customer connections.

    In relation to the restraint period commencement date, the Court held that placing Mr Guy on gardening leave did not have the effect of terminating the employment relationship, as during the notice period, neither party repudiated the contract and both acknowledged ongoing rights and obligations under it. As a result, the restraint period commenced on July 28, 2016. Therefore, the "notice period," operating in conjunction with the "restraint period," effectively produced a six-month restraint period. In relation to the validity of this six-month restraint, the Court found that Mr Guy occupied a senior position and would have been privy to confidential information and trade secrets relating to DPW's operating costs, throughput and efficiency, and client contracts. Further, any financial hardship caused by the injunction would be mitigated by DPW's offer to pay Mr Guy the equivalent of three months' salary. Having regard to Mr Guy's position, the nature of DPW's business, the small number of competitors in the market, and the confidentiality of the information, the six-month restraint was no longer than reasonably necessary to protect the legitimate interests of DPW in preserving its confidential information.

    This decision provides guidance on the factors that courts will consider to be relevant in assessing the validity of a restraint of trade. While a restraint cannot protect against mere competition, it may be justifiable to prevent an employee commencing work with a competitor in order to protect the confidential information and/or trade secrets of the employer. Further, there is no hard-and-fast rule as to the permissible length of a restraint.