INSIGHT

Court enforces four-year restraint

By Simon Dewberry
Employment & Safety Franchising Litigation Industrials

In brief

A court has enforced a four-year restraint of trade clause in a business sale contract, preventing a part-time employee from taking up employment with a competitor after selling his stake in the business. Senior Associate John Naughton reports.

How does it affect you?

  • Restraint clauses in business sale contracts protect the goodwill in the business being sold.
  • Courts take a less restrictive view of restraints of trade in business sale contracts than those in employment contracts, in view of the consideration paid for the business.
  • In employment contract restraints of trade, ex-employees will ordinarily be prevented from being engaged in a business that is competitive with the employer's business at the time the employment ends.
  • Since restraints of trade in business sale contracts protect goodwill, the measure of whether a seller may take up employment with a competitor usually involves an assessment of the business's competitors at the date of the sale contract.

Background

On 28 June 2016, Christopher Palmer sold his 40 per cent shareholding in Southern Cross Computer Systems Pty Ltd (Southern Cross) for $3.5 million.

The business sale contract included terms that Mr Palmer would continue as an employee of Southern Cross, and that he would be subject to a restraint of trade clause preventing him from working for any competing business for a period of four years after the sale took place.

For some months after the sale, Mr Palmer engaged in employment one day per week with a direct competitor of Southern Cross. In response, Southern Cross sought an injunction seeking to restrain Mr Palmer from having any involvement with this competitor.

Decision

The decision turned on the restraint of trade clause in the business sale contract.

The clause provided for a maximum of a four-year Australia-wide restriction on Mr Palmer engaging or having involvement in any business in competition with the Southern Cross 'at the relevant time during the restraint period'.

Mr Palmer submitted that the 'relevant time' meant during the four-year restraint period, and that the restraint should not be enforced because the effect would be to widen the scope of the activities the restraint precluded him from undertaking (in effect, preventing him from competing in activities Southern Cross may not even have been undertaking at the date of the sale).

However, the Supreme Court of Victoria accepted that:

  • the objective intention of the restraint clause was to restrict competition with Southern Cross as its business activities stood the day the business sale agreement was signed (not after); and
  • the competing business was undertaking activities in competition with Southern Cross when the business sale contract was signed.

The court therefore decided that the restraint clause was enforceable, and the term and scope (ie. a four-year Australia-wide restraint from involvement in a competitive business and from soliciting employees of Southern Cross) was reasonable in view of Mr Palmer having received substantial consideration upon the sale of his shareholding.

Southern Cross was granted an injunction preventing Mr Palmer working for the competitor until 28 June 2020. The court also indicated that it was prepared to make an order restraining Mr Palmer from soliciting customers, subject to it receiving from Southern Cross a list of relevant customers.