The Facts
Employment contract containing post-employment restraint clause signed by CFO
A large clothing retailer with outlets all over Australia employed a chief financial officer (CFO), based in Victoria. The CFO had worked in finance at a senior level in various industries, including apparel retail, although some considerable time prior to the events giving rise to the litigation.
The CFO started working for the retailer in January 2016. She and the company had negotiated an employment contract which included a clause purporting to restrict her ability to work for the retailer’s competitors after her employment came to an end.
While the CFO’s salary package was substantial (close to half a million dollars per annum), the contract contained a probationary period provision. It was asserted in evidence that this was because while the CFO had previously worked in apparel retail, she had not done so for some time and was instead coming from the health care industry.
CFO resigns to accept employment with competitor
At the start of May 2016, four months after she had started working for the clothing retailer, the CFO tendered her resignation to accept employment with a competitor, another national clothing retail chain. It transpired that the CFO had been in talks with this competitor before resigning.
The CFO’s former employer applied to the Supreme Court of Victoria, seeking declaratory and injunctive orders to prohibit her from working for the competitor during the restraint period.
Wording of the restraint of trade clause
The restraint clause was extensive, but its central provision was as follows.
Restricted Activities – Personal Engagement means directly or indirectly:
(a) being engaged, concerned or interested in;
(b) assisting or advising in respect of;
(c) carrying on any activity:
- which is the same as, or similar to, any part of the specialty brand and fashion business of a Group Company in which you were involved, or in respect of which you received Confidential Information, in the Connection Period; or
- for or on behalf of any of the entities operating the brands listed in Annexure A, their assignees, successors or transmittees (from which, it is acknowledged, BSS and the Group have a legitimate interest in withholding their confidential information and their connections with customers, employees and suppliers).
Annexure A was a list of 50 companies and brands, including the competitor the CFO had decided to join, along with entities such as Target, Kmart, Myer, David Jones and Woolworths.
Cascading provisions in restraint clause
The restraint clause was drafted in line with the current custom of “cascading” provisions. The time length of the restraint was 24 months after leaving employment; or if that were ruled invalid, 18 months; or if that were ruled invalid, 12 months.
In a similar cascading fashion, the geographic area of the restraint was the whole of Australia and New Zealand; or, if that were ruled invalid, Australia; or, if that were ruled invalid, Victoria.
It was up to the court to decide whether the restraint clause should be enforced, or whether it was too broad and therefore invalid.
Expert commentary on the court's decision
Victorian Supreme Court finds in favour of employee
In the case Just Group Pty Ltd v Peck [2016] VSC 614, the Supreme Court found in favour of the employee, Ms Peck.
The decision aligned with the position under the common law that a restraint of trade provision which is unreasonably wide will be held to be unenforceable, and that courts will not “rewrite” a contract provision of this kind so as to reduce it to an enforceable ambit.
Because of this, the restraint defined in “Resricted Activities – Personal Engagement”, which was unreasonably wide, was not enforceable. Also, the “cascading” provisions allowing a court to shorten the restraint time, or to reduce the geographic area of the restraint, did not help the employer, Just Group Pty Ltd.
The court rejected Just Group’s arguments that provisions in the contract could be severed, saying that the provisions in question were not severable and, even if they had been, severance is a discretionary matter. The judge said that in any case, he would not have exercised that discretion.
Furthermore, although a provision of the employment contract said in essence that the employee agreed that the post-employment restraints were not more than were necessary, if a court is satisfied that in a restraint provision is too wide, that consideration will usually override a statement to the contrary in the contract. That is indeed what happened in this case.
Employer’s possible motivation in taking legal action against former employee
It might be inferred that Just Group might not have gone as readily to litigation had Ms Peck been a loyal and long-serving executive who was simply ripe for a change of scenery.
Instead, she had quit a bare four months after starting work, at a salary considerably higher than that offered to her at the start of the contract negotiations, and had not disguised the fact that contrary to another provision of her employment contract, she had been in covert talks with the competitor, Cotton On, while still working for Just Group.
One of Just Group’s executives gave evidence that the group had brought Ms Peck “in from the wilderness”, by which he meant that she was being given a new chance in apparel retail after not doing so well elsewhere; so it may well have been that Just Group thought Ms Peck had bitten the hand that had fed her.
Beware including excessive restraint clauses in employment contracts
The moral for employers here is that draconian restraint clauses may not merely be ineffective, but may well backfire by leaving you less protected than you might have been otherwise.
Generally, courts will rule excessive restraint clauses unenforceable, so that the whole clause is struck down. This means that the employer is stripped of any protection at all against competition or poaching by the former employee.
Excessive clauses will in general not be saved by accompanying provisions saying that the employee agrees that the restraints are reasonable. “Cascading” clauses can be useful, but it needs to be remembered that these generally only operate so as to reduce the period or area during which the restraint applies.
If the restraint itself is excessive, cascading clauses will not help. And courts are most unlikely to “sever” offending provisions of the restraint clause.
Outcome may have been different if case had been heard in NSW
The action brought by Just Group was heard on the basis that the laws of Victoria applied, meaning that the tests used by the common law applied.
However, in NSW, section 4 of the Restraints of Trade Act 1976 allows a court to ignore the fact that a restraint goes beyond what is reasonable, permitting the court to enforce a restraint to the extent that it is reasonable, but no more than that.
However, this is still a matter for the court’s discretion, so the prudent course is to exercise restraint in drafting post-employment restraint clauses.