Restraint of trade and anti-solicitation clauses play an important role in many executive contracts. They ensure that the successes of one organisation are not so easily co-opted by rivals. However, there are limits on how far they can stretch in restraining competition. When drafting a contract, it is important to ensure that the terms do not exceed that which is permitted by law. When signing a contract, employees should first understand the nature of the agreement they are undertaking. Below is a summary of helpful principles relating to restraint of trade and anti-solicitation clauses as they are commonly presented in executive employment contracts.
Restraint of trade clauses restrict the ability of a party to engage in some form of conduct, usually to do with the practice of a trade or profession. The starting point for courts is that restraint of trade clauses are presumed to be void. This presumption can be overturned if it can be shown that the clause is justified. The party arguing that the clause is reasonable must demonstrate this in two ways. The clause will be upheld if it is necessary firstly to protect the reliant party’s interests and secondly if it is not detrimental to the public. If the clause does more than simply protect the rights of the reliant party and confers some undue benefit, it is unlikely to be valid. In coming to this determination, courts also consider the nature of the contract. Contracts between employer and employee are construed more strictly than others, due to the vertical relationship between the parties.
A range of other considerations courts can take into account include the remuneration paid to the employee, whether the clause has the intent or effect of causing the affected party’s total unemployment, the extent of the temporal and geographical range of the clause and the precision with which the restrained activity is identified. Further, the Restraints of Trade Act 1976 allows courts in NSW to read down the extent of a clause until it falls within acceptable bounds.
A contract of employment may also include clauses designed to prevent a departing employee taking customers and other employees along with them. They are similar to restraint of trade clauses but differ in that they are more concerned with the effect of conduct rather than conduct itself. Much of the difficulty surrounding anti-solicitation clauses comes from the fact that courts recognise the right of employers to maintain a stable workforce, but contrast this with the right of employees to choose where they work. Such matters are usually determined with reference to the precision of the clause, particularly the group of employees not to be solicited.
If a party breaches a valid restraint of trade or anti-solicitation clause, the natural remedy is an injunction to cease the offending conduct. However, courts will only grant this where damages will be inappropriate. Therefore, where the contract nominates damages for breach of the clause, only very professional drafting of the terms will prevent the courts from finding that the reliant party has conceded the adequacy of damages.
Where an ex-employee has caused other employees to join them, damages are generally appropriate.
Restraint of trade clauses are important for corporations to ensure that they can maintain some control over the expertise honed under their auspices. However, this is balanced by the need to protect employees from overly onerous restraints on their ability to find employment after leaving the organisation. Restraint of trade and anti-solicitation clauses must therefore be drafted with the utmost precision and care to ensure that they do not breach the rights of employees or the public interest and in doing so become unenforceable. Prospective employees should ensure they are aware of the effect of any such clauses before signing a contract of employment.
This article was authorised by Warwick Heeson