Losing staff members or clients to a competitor is a major concern for employers. One way employers can protect their competitive position is by inserting restraint of trade clauses into their employment contracts. These clauses limit the conduct of former employees, typically covering where they may work and/or solicitation of clients for a certain time. However, there are strict limits on how far a restraint can go. The courts will only uphold a restraint clause which is reasonably necessary to protect the legitimate interests of the employer.
If you are an employer, the importance of including properly considered and enforceable restraint of trade clauses in your contracts was highlighted by the recent WA Supreme Court case of Austal Ships Pty Ltd v Clay  WASC 178.
Austal relied on a restraint clause in an employment contract to prevent a former employee joining a competitor in the shipping industry. Mark Clay was Austal’s acting head of production. Mr Clay resigned from his position to join a competitor of Austal, Civmec, as a project manager. Relying on a restraint of trade clause in Mr Clay’s employment contract, Austal obtained an injunction restraining him from working for Civmec for six months after his resignation. The Court was satisfied that Mr Clay knew confidential information about Austal which could be advantageous to a competitor.
Austal submitted that Mr Clay had access to their costs of production and was part of ‘high level’ discussions about future work Austal was seeking. If this information was disclosed to a competitor it could allow them to estimate Austal’s building costs, giving them an unfair advantage if they intended to compete against Austal for work. This was particularly relevant as Austal were preparing a tender response for the sustainment contract of a project that Mr Clay would be working on for Civmec.
Employers and employees should also bear in mind the following regarding restraints of trade:
- An employer cannot restraint a former employee from joining an entity which is not an actual competitor;
- Restraining employees from working for competitors in any capacity is less likely to be enforceable;
- A contractual acknowledgement from an employee that the restraint is reasonable may be helpful, but it does not guarantee that a restraint does not enforceable.
If you require legal advice in relation to a restraint of trade issue, please feel free to contact us. Whether you are an employer and need assistance with the preparation or enforcement of a restraint of trade clause, or you are an employee and need advice on a restraint of trade in your employment contract, Hale Legal can assist you.