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An enforceable restraint of trade can be a key business asset.
Some might think about it as an insurance policy. The capacity to
preserve customer connections, protect confidential information and
discourage key executives from setting up their own business or
moving to a competitor can be critical to information rich
businesses operating in a competitive market.
This is the case now more than ever given that the Supreme Court
of Victoria's decision in Just Group Limited v
Peck [2016] VSC 614 (later affirmed on appeal) has
arguably raised the bar for correctly drafting an effective
restraint.
This success can be attributed to the practice of regularly
revisiting the questions of which key executives or employees
should be subject to restraints, and how those restraints should
operate. The yearly promotion, pay rise or management re-shuffle
cycles are perfect opportunities to update restraint provisions.
Often, this is when operational changes (such as the make-up of
roles) become effective, so restraints can be tweaked to align with
these changes. A promotion or pay rise can be tied to a new
contract or restraint provision. Instead of adopting a
one-size-fits-all approach when an employee first joins the
business, employers can increase the likelihood that a restraint
will be enforceable by showing it was the subject of specific
negotiation during the employment.
Experience in this area reveals one key distinction which
separates cases where restraints are successfully upheld and those
where compromise outcomes are achieved.In successful cases,
typically, the restraint provision has been drafted neatly around
the key protectable interests. When seeking to enforce a restraint,
an employer will be required to show there is a protectable
interest capable of supporting the restraint. This is the first
limb of the test for enforceability. The scope, duration and
geographical operation of the restraint are logically tied to the
protectable interest (see our map below). An employer will need to
make out each of these elements to meet the second limb of the
test.
Post-Employment Protections Legal Dimension – Map
If the restraint then needs to later be relied upon down the
track, the employer has the benefit of a provision which protects a
current business asset (e.g. key connections with important
customers or suppliers who the employee is in contact with) this is
likely to be enforceable in court. If the opportunity to update a
restraint has been missed, it may be necessary to try to force fit
the facts into a restraint that might have been drafted years
earlier in a very different business context – for example,
when the employee was performing a different role. This can
increase the degree of difficulty when enforcing a restraint.
Although courts will give employers some latitude –
because the reasonableness of a restraint is judged at the time it
was entered into – that latitude is limited. Regular
housekeeping means that it won't be necessary to call on this
latitude because the restraint is fit for its purpose, and
enforcement proceedings can be approached with confidence.
Doing this work inevitably pays dividends over the long term.
Preparing an effective restraint is similar in concept to buying an
insurance policy. You hope you won't have to call it in. But if
you do need to call on it, you are very glad you have it. The past
decision to do the work inevitably looks very wise.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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