The Victorian Court of Appeal recently revisited the enforceability of restraint clauses in employment contracts. Just Group Limited (ACN 096 911 410) v Nicole Peck [2016] VSCA 334 considered an appeal from a Supreme Court decision (Just Group Limited v Peck [2016] VSC 614) which determined Ms Peck, a former employee of Just Group Limited (Just Group) was not bound by restraint clauses in her employment contract.
In dismissing the appeal, the Court reiterated the illegality of restraint clauses that are too broad.
The decision confirms that a ‘shotgun’ approach is not the answer to drafting effective restraint clauses in employment contracts.
Background
Ms Peck was employed as Chief Financial Officer at Just Group, a speciality brand and fashion retailer with over 1,000 stores and e-commerce internet platforms. Its brands include Smiggle, Peter Alexander, Just Jeans, Jay Jays, Portmans, Jacqui E and Dotti.
Ms Peck commenced work with Just Group in January 2016 and resigned in May 2016 after securing employment as General Manager of Group Finance and Treasury at Cotton On, a rival of Just Group.
Just Group sought to enforce the restraint clauses contained in Ms Peck’s employment contract through the Supreme Court. The contract contained several provisions which purportedly prevented Ms Peck from working with 50 retailers (including Cotton On) anywhere in Australia and New Zealand for a period of 12 to 24 months.
The contract prohibited ‘restricted activities’ which included, Ms Peck either directly or indirectly:
– being engaged, concerned or interested in;
– assisting or advising in respect of; or
– carrying on any activity:
the ‘same as or similar to’ Just Group or ‘for or on behalf of’ the 50 entities listed in an annexure to the agreement.
The law and the decision
A restraint clause is void, as against public policy, unless it is reasonably necessary to protect the legitimate interests of the employer. The legitimate interests of a business comprise confidential information, trade secrets and customer connections, however a restraint must go no further than reasonably necessary in terms of duration and extent, to protect the employer.
The Court recognised Just Group’s legitimate interest in the confidential information to which Ms Peck had access, however the restraint provisions were considered too broad and unreasonable.
Given their true meaning in the context of the contract, the words ‘any activity…the same as or similar to’ and a business ‘similar to any part of’ Just Group could encompass any role with any retailer of apparel or stationery – an extremely broad restraint that, if enforced, could significantly limit Ms Peck’s employment opportunities.
The restraint also sought to prevent Ms Peck from working in any capacity for 50 specifically-named entities. Just Group provided no evidence of competition with 46 of those entities or evidence regarding the relevance to those entities of the confidential information acquired by Ms Peck. Consequently, Ms Peck would be prohibited from working with those companies even where the confidential information would be irrelevant to that role.
The 12 to 24-month restraint period was also considered unreasonable in light of the termination provisions of the contract which entitled Just Group to dismiss Ms Peck during her first six months of employment with one month’s notice.
Reading down and severing clauses
The employment contract contained ‘cascading’ provisions. These are alternate provisions that may enable a Court to strike out a harsher (unreasonable) restraint whilst retaining a less-restrictive and reasonable clause.
The contract also contained a clause stating that if certain restraints were considered void as unreasonable words could be deleted or the duration or location of restraint reduced as necessary to make it valid.
The Court declined to do this on the basis that the general law does not permit a restraint clause to be ‘remade’.
If a clause is ambiguous, it will be construed in favour of the employee but only where two reasonable interpretations are possible. However, the Court will not adopt its own interpretation of a general clause that is unduly wide to save it from invalidity.
The content of the clause must convince the Court of what the parties intended at the time the agreement was made – if this intention is lacking and the clause is unreasonable then it will fail entirely.
The Court will sever an unenforceable restraint clause to save a reasonable restraint with caution and provided only that:
- The clause contains a combination of several distinct covenants rather than a single covenant.
In this case, Just Group argued that the Court could sever 49 of the 50 ‘forbidden’ entities from the list attached to the employment contract to enforce the restraint only against Cotton On, a known competitor of Just Group.
The Court declined on the basis that the clause referring to the annexure was a ‘single covenant’ – to sever components (entities) from the annexure would go too far resulting in the remaking of the provision.
- The invalid words must be capable of being deleted with the result that the remaining clause can stand alone. In other words, the Court can remove the offending words but not add to or rewrite the clause so it makes sense.
Had the case been heard in New South Wales, Just Group may have had a better outcome. The Restraints of Trade Act 1976 (NSW) provides that restraint clauses are valid to the extent only that they are not against public policy. A Court may read down a restrictive provision or ‘rewrite’ an offending restraint clause as it thinks fit.
In other jurisdictions, the general law applies and the Court will not remake an unreasonable clause to make it reasonable.
Take home points
- The reasonableness of a restraint clause will be determined in the individual circumstances of each case, noting that a restraint clause in an employment contract will be construed more strictly than in a sale of business contract.
- The onus of proof to establish the reasonableness of a restraint clause falls to the person seeking to enforce it.
- Employment conditions, for example, salary, will not influence the Court’s determination of what is reasonable, noting that Ms Peck’s annual salary package exceeded $450,000.
- The inclusion of terms stating the employee’s acknowledgement that the restraints are reasonable to protect the legitimate interests of the business will not prevent the clause from being void.
Conclusion
Restraint clauses must only go so far as necessary to protect the interests of the employer. If the clause is too broad, then employers risk the restraint being totally ineffective.
Employers are encouraged to review their employment contracts and, if necessary, seek assistance on ‘toning down’ restraint provisions which may fail completely should a case come before a Court.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9818 2888 or email [email protected].
