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Lessons from restraint of trade clauses

There have been a number of cases moving through State courts where parties have tried to enforce restraint clauses against former and even prospective employees.  These cases provide some important lessons to employers who are seeking to enforce restraint clauses.

Network Ten Pty Ltd v Seven Network (Operations) Ltd

In this high profile case before the New South Wales Supreme Court, the alleged restrained party (‘the Employee’) had been an employee of Seven pursuant to a written employment contract.  The Employee was a very experienced, and evidently, much sought after person in his field of expertise.  About 13 months after executing the employment contract with Seven, the Employee signed another employment contract with Network Ten, for an initial term of 2 years.  The Employee then provided notice to Seven that he would be resigning.

Three days after signing the new contract with Network Ten, the Employee changed his mind. The Employee told Network Ten that he would not be commencing employment with them and he subsequently withdrew his resignation from Seven.   He then signed a further document with Seven that acknowledged his withdrawal of the resignation and confirming a new role with Seven.  The new role involved a salary that was 4 times more than his previous role, and was significantly higher than the salary offered to him by Network Ten.

The proceedings in this matter were commenced on the basis that Network Ten alleged that the Seven had intentionally interfered with the employment contract he signed with Network Ten in relation to their ultimately successful attempts to have the Employee change his mind and not proceed with the employment contract that he signed with Network Ten.

Decision

Counsel for Seven argued that the first hurdle that Network Ten needed to overcome was whether the Employee had actually breached the employment contract he signed with Network Ten.  If he had not breached that agreement, Network Ten could not argue that Seven had interfered with that contract.

Judge Stevenson noted that the Network Ten employment contract was for a term that commenced at the end of the 3 month notice period that the Employee was obligated to give Seven.  His Honour therefore held that the breaches of contract alleged by Network Ten could not in fact be breaches, as the Employee had not yet commenced his employment under the new contract.  The Judge contemplated that the agreement had commenced from the signing of the contract, but as the terms that Network Ten alleged to have been breached required the employment to have commenced, the Employee had no case to answer in relation to those terms.

Despite finding that there was no breach of contract in the circumstances, Judge Stevenson went on to consider whether Seven had ‘procured a breach’ of the Employee’s employment contract with Network Ten.

In that respect, his Honour held that Seven had applied “pressure, procuration and persuasion to [the Employee] to walk away from the Ten Agreement”. In finding that Seven had intentionally interfered with the Employee’s contract with Network Ten, Judge Stevenson stated:

“Through its senior executives, Seven set out to persuade [the Employee] to change his mind and stay with Seven. Those senior executives made an extraordinarily generous financial offer to [the Employee]which, I have found, they knew would more than match what Ten had offered (and [the Employee] had accepted) and which they intended would cause [the Employee]to rethink his position. They assisted [the Employee]with the preparation of [the Employee’s]draft email to Ten announcing his decision to renege on his agreement with Ten. … they urged him to stay at Seven, knowing that would involve breaching his agreement with Ten.”

His Honour confirmed that if there had been a breach of contract by the Employee, then in those circumstances he would have been satisfied that Seven ‘intentionally and knowingly’ induced that breach.  However, given the earlier finding that no breach could have occurred, this claim was not accepted.

Fairfax Media Management Pty Ltd v Harrison

In another recent New South Wales Supreme Court decision, Fairfax made an application for an injunction to restrain Mr Harrison from working for Yahoo!7.

Mr Harrison had commenced with Fairfax in January 2009.  In October 2011, Mr Harrison was promoted and subsequently signed a new contract with Fairfax.  The contract contained a restraint clause that restrained Mr Harrison from working for a competitor for 6 months.  It also required him to provide 12 weeks’ notice of any resignation.

In December 2013, Mr Harrison gave the requisite 12 weeks’ notice of his resignation to Fairfax.  Mr Harrison had decided to accept the CEO role at Yahoo!7, to commence in mid-2014.  Mr Harrison’s second in charge also gave notice of his intention to resign.   Both employees were subsequently placed on garden leave for their respective notice periods.

On 16 December 2013, Fairfax wrote to Mr Harrison to remind him of his post-employment obligations. On 19 March 2014, Yahoo!7 responded to Fairfax’s letter and indicated the Yahoo!7 were not of the view that the restraints in Mr Harrison’s contract were enforceable, and that Mr Harrison would commence work with Yahoo!7 on 9 April 2014.  This date fell some 2 months inside the restraint period set out in his employment contract with Fairfax.

On 9 April 2014, Mr Harrison commenced work with Yahoo!7 and on the same day, Fairfax responded to Yahoo!7 and said that they would seek urgent injunctive relief if Mr Harrison commenced work before 11 June 2014.  Fairfax ultimately commenced proceedings on 17 April 2014.

Decision

Judge Ball was called upon to determine whether Fairfax should be granted an injunction to restrain Mr Harrison from working for Yahoo!7 until his restraint period had expired.  Fairfax claimed that the restraint was ‘no more than reasonable necessary’ in the circumstances of the case, given Mr Harrison’s senior position and the high level connections and confidential information to which Mr Harrison had access.

His Honour agreed, stating that:

“I am satisfied that Fairfax has a strongly arguable case on these issues. Mr Harrison was a senior employee who it is to be expected would have become familiar with all aspects of APM’s business including confidential information relating to the strategies that will be adopted by Fairfax to compete with its competitors…Fairfax has a strongly arguable case that a restraint for 6 months was reasonable. Having regard to Mr Harrison’s seniority, it could be expected that it would take some time to replace him and his replacement would be likely to require some time to build up the connections that Mr Harrison had.”

However, Justice Ball declined to provide Fairfax with injunctive relief in the circumstances.  Part of the reason for this was that Mr Harrison had provided significant undertakings and acknowledgements to not deal with any advertisers of Fairfax during the restraint period, and to not deal with any of Fairfax’s confidential information to the detriment of Fairfax.  Judge Ball also held Fairfax had not established what the real risk was to Fairfax in relation to the advertisers or the confidential information in the circumstances.

Most significantly however, Judge Ball determined that Fairfax’s delay in commencing proceedings meant that it should not receive injunctive relief, stating:

“… Fairfax is guilty of delay in commencing these proceedings. It is apparent from Ms Hambly’s letter dated 9 April 2014 that she was on notice that there was at least a serious risk that Mr Harrison would commence employment with Yahoo!7 on 9 April 2014 as a result of what Mr Briscombe said in his letter dated 19 March 2014. Yet, Ms Hambly delayed approximately 3 weeks before replying to that letter and Fairfax delayed a further week before commencing proceedings. In my opinion, there has not been an adequate explanation for those delays. The delays are very substantial in a context where the injunction sought by Fairfax would only last for a period of 7 weeks. In the meantime, Mr Harrison commenced employment with Yahoo!7. It would be disruptive both to it and to Mr Harrison to grant an injunction now and, for the reasons I have given, that injunction would do little to protect any legitimate interest that Fairfax has.”

Implications for Employers

The first case demonstrates what a Court may consider if asked to determine whether an employer can be held liable for an inducement to breach contract where, for example, it may employ a worker with knowledge of a restraint of trade that would arguably operate to prevent the worker commencing with it for a period of time.

The second case emphasises the importance of acting swiftly should an employer wish to attempt to enforce a restraint clause in an employment contract.  Courts have historically questioned why an employer would delay commencing proceedings of this nature if the breach was serious and arguably detrimental to its business.

Mark Bunch, Partner

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