Restraints more readily enforced for "face" of a business

23 August 2012 7:28am

A full bench of the Federal Court has upheld a two-year restraint as "reasonable", saying the non-solicitation provisions in an executive's contract did not offer enough protection for his former employer.

Earlier this year the Federal Court upheld the restraint clause, prohibiting the employee involved - the former managing director of human resources and recruitment outsourcing company HRX - from doing any HR consulting work for two years.

The MD had accepted a senior position with HRX's direct competitor, Talent2. But Justice Robert Buchanan found that he posed a threat to HRX's business if he were permitted to continue working in the HR industry, because he was the primary contact for most of HRX's clients.

In upholding the restraint, Justice Buchanan noted that its terms required HRX to compensate the MD for 21 of the 24 months of its duration (as well as award him shares in the business) and that he had obtained legal advice before signing it.

Non-solicitation clause not enough

In his appeal, the MD argued that the restraint wasn't reasonably necessary to protect HRX's business interests, because he had also signed a non-solicitation clause that prohibited him from soliciting both HRX customers and employees.

HRX claimed, however, that the clause was insufficient to preserve its customer connections because clients might "gravitate" to him, especially given his role as the "human face" of HRX.

The full bench of the Federal Court agreed that the non-solicitation provisions "would not have protected HRX from the risk that its customers, knowing of [the MD's] move to Talent2, would choose to move their business to Talent2 unbidden by [the MD] and without even discussing the move with him".

It also wouldn't protect HRX in the event that the company did not become aware of a breach.

Further, it was "not in the least fanciful" to regard the non-solicitation clause as inadequate protection given that the MD had emailed an HRX client to say: "I cannot solicit your business... but I believe you can solicit my services if you know what I mean."

"It is, no doubt, correct that the sending of this email was a breach of the non-solicitation clause; but to acknowledge that now is a cold comfort to HRX. Had this litigation not been commenced by HRX, it might never have known of this communication," the bench said.

Reasonable manner of protection

Noting that a restraint "must afford no more than reasonable protection as between the parties", the bench found the contract was "reasonably necessary" to protect HRX's interests.

In coming to its conclusion the bench noted that:

the allocation of shares to the MD, and provision of payment for 21 of the 24 months of the restraint period, made it a "quid pro quo" arrangement.

"There is no reason to think that there was any inequality of bargaining power in the negotiations which led to this arrangement. Indeed, [the MD's] prominence in his field was such that he might be said to have held the upper hand in the negotiations...";

the geographical limitations of the restraint - extending across Australia - were not excessive, because the MD's work in Australia, reporting to Talent2 in Hong Kong, could potentially harm HRX's ability to provide services to existing clients embarking on overseas ventures; and

the two-year restraint accommodated the contractual cycle on which HRX operated, thus affording HRX the opportunity to renew its contracts without the risk that a client would choose to "stay" with the MD.

The bench rejected the appeal and ordered the MD to pay HRX's costs, which are estimated to be in excess of $1 million.

Draft specific clauses

According to Mills Oakley senior associate Erin Rice, the ruling doesn't set any new legal principles, "but it does demonstrate the importance of individual tailoring for key employees".

The ruling "demonstrates the increasing willingness of the courts to hold employees to their bargain, in circumstances where the employee is the 'face' of the business, and particularly where the employee has been involved heavily in negotiations and the clause has been tailored specifically to that employee", she says.

Of particular importance in this case was the fact that the restraint provided that HRX would pay the MD while he was prevented from working, and also offered him a share in the business.

"That's quite critical, because he was receiving something he wouldn't have received if he had remained in the employment."

Rice notes that employers often don't want to include provision for compensation during restraints - because it is expensive - but she recommends they do, "because it is something that, in previous authorities, has been seen as important, and is more likely to allow the restraint to be seen as reasonable".

Watch this webcast to hear Erin's tips and tricks for drafting enforceable restraints (HRD Plus gold subscribers only). Erin is also co-presenting a seminar on this topic in Melbourne next week - click here for details.

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