Restraint of trade clauses: more enforceable than you think

A recent decision of the Victorian Court of Appeal demonstrates that restraint of trade clauses in employment contracts can be enforceable, despite the common belief that these clauses are ineffective.

Restraint of trade clauses are generally used to restrict employees from competing with their employer, using the employer’s confidential information or trade secrets, and to prevent them from poaching clients of the employer, for a period of time after their employment has ceased.

While the courts have in the past shown a reluctance to uphold restraint of trade clauses (believing that limits should not be readily imposed on an individual’s right to work), the decision in Birdanco Nominees Pty Ltd v Money shows that these clauses will be enforced where they are found to reasonably protect the goodwill of the employer’s business.

In that case, Mr Money had provided accounting services to clients in the course of his employment with Bird Cameron (a firm of charted accountants), and then upon leaving Bird Cameron, he continued to provide accounting services to those same clients, but in a different employment capacity. Thus, in effect, he had poached those clients from Bird Cameron.

Mr Money did this in spite of the existence of a restraint of trade clause in his employment contract with Bird Cameron stipulating that such provision of services was prohibited for a period of 3 years post-employment and providing for liquidated damages in the event he breached the restraint.

The Court held that the restraint of trade clause was enforceable and granted Bird Cameron both an injunction and liquidated damages calculated as 75% of the fees received by Mr Money from the former clients.

This shows that restraint of trade clauses can be effective in protecting your client base and business goodwill. However, caution must be exercised when drafting these clauses to ensure that they are reasonable and do not unnecessarily restrict a person’s right to employment.

For assistance in reviewing or drafting restraint of trade clauses in your employment contracts, please contact Certus Legal Group.

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