Protecting your business with enforceable restraint clauses
Two recent New South Wales Court of Appeal decisions suggest that employers can rely on well-drafted restraint clauses to prevent former employees from soliciting clients and competing against them.
In the case of Ross & Anor v IceTV the court of appeal held it was reasonable to enforce a restraint clause restraining two senior executives for a period of 12mths from competing with their former employer, which distributed an electronic program guide.
It was deemed the senior executives held senior roles in a very small organisation, exercised considerable control over the business, were exposed and involved in considerable high level negotiations with customers and potential customers, developed relationships with customers and had extensive knowledge of the business technology and pricing systems. 12 months was found to be a reasonable period of restraint.
In the case of Hanna v OAMPS Insurance Brokers a 12 month restraint period for a senior insurance broker with 20 years' service was deemed reasonably necessary by the Court of Appeal to protect the legitimate interests of the former employer (an insurance brokerage firm). This was because the insurance broker had strong connections with the clients of the former employer and the former employer renewed its clients' insurance contracts only once in a 12 month period.
Although both of these findings were determined in New South Wales, the fundamental principals discussed in the cases otherwise apply across all Australian jurisdictions.
In order to protect legitimate business interests, such as client relationships, employers should ensure a reasonable restraint clause is incorporated into their employment contracts, particularly in relation to senior employees with client relationships and knowledge of the employer's confidential and sensitive business information.
When incorporating restraint clauses into employment contracts, employers should take the time to ensure that each restraint is reasonable in the circumstances according to the employee's position and the nature of the employer's business, and where it is difficult to ascertain what is reasonable, employers can adopt cascading provisions, provided each is severable and independently binding