Tuesday, 11 February 2014

Restraint of Trade Clauses – Are Yours Drafted Correctly?

Employment restraints can provide valuable protection of a businesses’ competitive position, goodwill and trade secrets by restricting an employee’s ability to compete for a period of time after their employment ends.

However, such clauses have to be specifically tailored to the circumstances of the individual’s employment and the broader business, and must be carefully drafted to be effective.

If not they will be effectively struck out – as the employer in one recent case discovered.

Complete Field Maintenance Pty Ltd v Coulson

In the case, Complete Field Maintenance Pty Ltd (CFM) provided parts and labour to the mining industry in the Pilbara in WA, including to Rio Tinto mine at its Paraburdoo mine (which comprised, in the event, about 50% of CFM’s turnover). Mr Coulson was CFM’s most senior employee and worked as its GM in charge of the labour hire division, which involved him negotiating, hiring, and supervising staff at the mine.

After his relationship with CFM soured, he resigned in May 2013, before starting work within one month for a competitor, Pilbara Hire Group (PHG). PHG then placed him as a heavy diesel fitter in the Rio Tinto workshop at the mine, working alongside other employees he had previously placed while at CFM. CFM alleged that this also involved him replacing at least one, if not two, workers formerly placed by CFM at the mine.

CFM sought an injunction to enforce a restraint of trade clause in his agreement with CFM, which prevented him for 12 months from providing services for any client or supplier “of the nature” of those provided by CFM during his employment.

However, the Supreme Court of WA refused to grant the injunction, in part because there was no evidence that the former GM had disclosed or was likely to misuse CFM’s confidential information.

More importantly, it said that his role with PHG was substantially different from the role he had performed for CFM, making it doubtful that he could be shown to be performing services that were “of the nature” of those provided by CFM. As a result, it was doubtful that he was actually breaching the clause.

Even if that was not the case, the Court said that there were “real questions” about whether the restraint went further than necessary to protect CFM’s business, firstly, because it sought to prevent him from performing such a different role with a client than the one he had formerly performed with CFM.

Also, the clause was drafted in such a way as to prevent the former GM from providing competitive services to all clients or suppliers of CFM, and not just to those that he had dealt with or established a relationship with while at CFM. As such, it was arguably too wide on its terms to be enforced.

The injunction was accordingly rejected.

Lessons for Businesses

Courts are reticent to enforce any restraint that unduly restricts an employee ability to earn a living in their area of expertise/experience and will attempt to strike a balance between the protection of a business’s commercial interests and the employee’s ability to find another suitable job.

Clauses must be therefore tailored to the specific, legitimate business interest that the business wishes to protect. ‘Catch all’ restraints such as those in the above case may be struck down as being too wide, leaving the employer unprotected.

Restraints must be customised to reflect each employee’s role and the genuine interests of the business concerned.

If you are hiring new staff or are concerned that your current employment contracts do not adequately protect your business, call HR Legal to have your agreements reviewed.

* Complete Field Maintenance Pty Ltd v Coulson [2013] WASC 374


This article was produced by HR Legal. It is intended to provide general information only in summary format on legal issues. It does not constitute legal advice, and should not be relied on as such.

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