Restraints of trade and cus­tomer connections

It is well estab­lished that restraints of trade in employ­ment con­tracts will not be enforced by a court if they are con­sid­ered to be unreasonable.

Some­times a restraint of trade is deemed to be unrea­son­able because it oper­ates over too wide an area, or for too long a peri­od of time. Some­times a restraint of trade will be deemed unrea­son­able because it does not pro­tect a legit­i­mate inter­est of the employ­er – such as the pro­tec­tion of trade secrets or con­fi­den­tial infor­ma­tion, or to pre­vent an employ­ee with close con­nec­tions to cus­tomers from tak­ing those cus­tomers with them when they change employment. 

With that in mind, con­sid­er the fol­low­ing restraint of trade pro­vi­sion used in a con­tract for a Senior Com­put­er Tech­ni­cian who had fre­quent con­tact with his employ­er’s customers:

13.1 For a peri­od of three months from the date the employee’s employ­ment with the employ­er con­cludes (for any rea­son), the employ­ee may not direct­ly or indi­rect­ly, in any capac­i­ty whatsoever:

(a) Act for any per­son or enti­ty (nat­ur­al or oth­er­wise) that the employ­er had or has as a client dur­ing the six month peri­od imme­di­ate­ly pri­or to the employ­ment with the employ­er con­clud­ing; or

(b) Con­tact or cause anoth­er to make con­tact with any per­son or enti­ty (nat­ur­al or oth­er­wise) that the employ­er had as a client dur­ing the six month peri­od imme­di­ate­ly pri­or to the employ­ees employ­ment with the employ­er con­clud­ing, with a view to entic­ing that per­son or enti­ty to use the pro­fes­sion­al ser­vices of the employ­ee or a third party;”

At first blush, this con­trac­tu­al pro­vi­sion seems to tick a num­ber of box­es” which go to estab­lish­ing the rea­son­able­ness of a restraint of trade, for example:

  • The peri­od of restraint is only for three months (not sev­er­al years).
  • It only pro­hibits the employ­ee from act­ing for or mak­ing con­tract with clients where those clients had been clients of the employ­er in the 6 months imme­di­ate­ly pri­or to the ter­mi­na­tion of employment (rather than any client in the his­to­ry of the company).

Why then was such a restraint deemed to be unen­force­able on grounds of unrea­son­able­ness by the Dis­trict Court of Queens­land recent­ly in Comm­sup­port Pty Ltd v Mirow [2018] QDC 134?

The judg­ment is a use­ful reminder that there is no legit­i­mate inter­est in an employ­er using a restraint of trade to pre­vent com­pe­ti­tion per se. Rather, a legit­i­mate inter­est can exist in restrain­ing a for­mer employ­ee where a rela­tion­ship has been devel­oped between the employ­ee and a cus­tomer which could be a con­tribut­ing fac­tor in the cus­tomer’s deci­sion to give its busi­ness to a com­peti­tor for whom the employ­ee goes on to work (see para 58 of the judgment). 

The judg­ment also makes clear that it is more like­ly to be con­sid­ered rea­son­able to restrain an employ­ee from deal­ing with cus­tomers post-ter­mi­na­tion of employ­ment, if part of the employ­ee’s duties at work includ­ed cul­ti­vat­ing the rela­tion­ship with those cus­tomers (see para 62). 

Estab­lish­ing that an employ­ee had con­tact with cus­tomers will rarely be enough of itself – it is only where the type of con­tact was such that the employ­ee holds an influ­ence over the cus­tomers that a court will read­i­ly enforce a restraint of trade (see para 67). 

The Judge in Comm­sup­port v Mirow high­light­ed an issue that fre­quent­ly aris­es in the draft­ing of such restraints: 

67.A point upon which restraints often fail in respect of the cus­tomer con­nec­tion inter­est, is not that the employ­ee sought to be restrained had no such rela­tion­ship of influ­ence over cus­tomers of the employ­er, but rather the restraint has been drawn so broad­ly that it applies not only in respect of those cus­tomers with whom there was such a rela­tion­ship, but also to those whom there was no such rela­tion­ship. It is at this point that the legit­i­ma­cy of the inter­est gives way to the restraint being seen as one mere­ly against com­pe­ti­tion. The employ­ee could be con­sid­ered to have no more influ­ence over such cus­tomers than a stranger.” (foot­notes omitted)

In the cur­rent case, because the restraint sought to restrain the employ­ee from act­ing for or con­tact­ing any per­son who had been a cus­tomer of the employ­er in the six months before ter­mi­na­tion of employ­ment, and did not lim­it this to those cus­tomers with whom the employ­ee had a cus­tomer con­nec­tion, this was found to be a sig­nif­i­cant con­tribut­ing fac­tor in the court’s deter­mi­na­tion that the restraint was unenforceable. 

Had the case been heard in NSW it is pos­si­ble the result may have been dif­fer­ent – giv­en that NSW courts have more pow­ers to read down” oth­er­wise unen­force­able restraints of trade pur­suant to the Restraints of Trade Act 1976 (NSW).

The case is a use­ful reminder of the impor­tance of not draft­ing restraint of trade pro­vi­sions too broad­ly and, in respect of restraints deal­ing with the solic­i­ta­tion of cus­tomers, con­sid­er­ing whether to lim­it such restraints to only those cus­tomers with whom the employ­ee dealt dur­ing the employ­ment in say, a set peri­od lead­ing up to ter­mi­na­tion. Nar­row­ing the restraint in this fash­ion, may assist in enhanc­ing the enforce­abil­i­ty of a restraint by lim­it­ing its appli­ca­tion to those cus­tomers where a cus­tomer con­nec­tion is like­ly to be found.

The case is also notable on two fur­ther grounds. First­ly, it con­firms that in assess­ing rea­son­able­ness of restraints the par­ties’ rel­a­tive bar­gain­ing pow­er will also be a rel­e­vant fac­tor (see paras 70 – 85).

In oth­er words, the less bar­gain­ing pow­er the employ­ee had to nego­ti­ate the terms of the restraint, the more like­ly the court will be to find it has been unrea­son­ably drafted.

In the cur­rent case, the employ­ee was told that the employ­er would not accept any changes to the word­ing of the restraint, and was giv­en the impres­sion that their job was at risk if they did not sign the con­tract. This was a fac­tor tak­en to be in favour of the unrea­son­able­ness of the restraint.

Sec­ond­ly, the case is notable in that it pro­vid­ed some com­men­tary (albeit brief) on the issue of restraints of trade being void for lack of consideration.

An argu­ment is some­times run that – in cir­cum­stances where a restraint of trade is intro­duced for an exist­ing employ­ee, but with­out them being pro­vid­ed with any extra ben­e­fit (eg increased pay) – the amend­ment to the con­tract of employ­ment lacks con­sid­er­a­tion” (which is, of course, an essen­tial ele­ment of any contract).

The rel­e­vant pas­sage of the judg­ment is as follows:

86.On the relat­ed issue of con­sid­er­a­tion, [the Employ­er’s Coun­sel sub­mit­ted] that what was being offered in return for the restraint was con­tin­ued employ­ment which was sub­stan­tial con­sid­er­a­tion because it pro­vid­ed ongo­ing salary, ongo­ing access to clients and an ongo­ing abil­i­ty to learn how the var­i­ous sys­tems oper­at­ed while being paid. That is a com­plete answer to the con­tention that [the employ­ee] obtained no advan­tage what­so­ev­er in return for sign­ing the [employ­ment agree­ment con­tain­ing the restraint]. Although no author­i­ty was cit­ed in sup­port of the sub­mis­sion, it exists. 

87​.In Elec­troboard Admin­is­tra­tion v O’Brien the New South Wales Court of Appeal con­sid­ered a case in which an exist­ing employ­ee was asked to sign a let­ter which would add a term in restraint of trade, includ­ing post-employ­ment restraint, to her con­tract. For about a year she worked on with­out sign­ing the let­ter, but under mount­ing pres­sure even­tu­al­ly capit­u­lat­ed and signed. The tri­al judge’s con­clu­sion was that it was clear that she had signed because she was con­cerned that she might lose her employ­ment. Of the con­tention that the new term was not sup­port­ed by con­sid­er­a­tion, Meagher JA, with whom Mason P and Priest­ley JA agreed, said at:

They lost before Cohen J because his Hon­our held that the new term was not sup­port­ed by any con­sid­er­a­tion. In my view the appellant’s are cor­rect in sub­mit­ting that his Hon­our fell into error. On his Honour’s own find­ing, the appel­lants said to Mrs O’Brien we shall dis­miss you if you don’t sign’, or alter­na­tive­ly we shall not dis­miss you if you do sign’, I can­not see how such an agree­ment lacks con­sid­er­a­tion: this is a ben­e­fit to the employ­ers in obtain­ing the sig­na­ture, and a ben­e­fit to the employ­ee in divert­ing the prospect of immi­nent dis­missal.” (foot­notes omitted)

The judg­ment did not deal with a sit­u­a­tion where an employ­ee enters into a new con­tract of employ­ment con­tain­ing a restraint in a sit­u­a­tion where the employ­ee’s employ­ment is not at risk if they refuse to sign. In such a sit­u­a­tion – where the employ­ee is not pro­vid­ed with any addi­tion­al ben­e­fit for sign­ing (such as a pay rise) – it would seem it will still be open to the employ­ee to argue that the restraint entered into was void for lack of consideration.

Employ­ers are there­fore advised to con­sid­er the issue of con­sid­er­a­tion care­ful­ly when enter­ing into new con­trac­tu­al restraints with exist­ing employees.