Justice upholds restraint clause

Federal Court of Australia
Federal Court of Australia

THE Federal Court of Australia has ruled that a restraint of trade clause of two years in length was enforceable.

In the decision of HRX Holding Pty Ltd v Pearson, Mr Pearson, a director and employee of HRX, had the two year restraint clause enforced after he resigned from his position and sought employment at one of HRX's major competitors.

The agreement signed by Mr Pearson provided that he was restrained from taking employment or engaging in "business or operations similar to or competitive with the business". Justice Buchanan held that the scope of the Employment Agreement was not unreasonable as it provided reasonable and legitimate protection to HRX in its area of operation.

In finding that the duration was reasonable, Justice Buchanan had regard to:

  •  the fact that the duration was a particular point of negotiation during the construction of the agreement;
  •  the shareholding of Mr Pearson;
  •  the arrangement to pay Mr Pearson for all but three months of the restraint period;
  •  that HRX typically had two to three year contracts with its clients and that a two-year restraint would prevent Mr Pearson from encroaching or intervening in client relationships; and
  •  that no other employee had an agreement that provided for payment during a restraint period.

Justice Buchanan did not accept the argument by Mr Pearson's counsel that the Fair Work Act 2009 (Cth) excluded the operation of the Restraints of Trade Act 1976 (NSW).

Implications for employers: while the enforceability of restraint clauses ultimately turns on the facts of each individual case, this decision provides an overview of relevant factors which employer's may use to aid the strength of a restraint clause. It also demonstrates that restraint clauses may be enforced where its terms are reasonable and protects a legitimate interest of the employer.

However, careful consideration should always be given to drafting restraint clauses.

Lisa Aitken is an accredited specialist in workplace relations law and the principal of Aitken Legal, a law firm specialising in employment law for employers. The information in this column is intended as a guide only. Liability limited by a scheme approved under professional standards legislation.

Topics:  federal court of australia law opinion

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