Employers and employees need to carefully consider restraint of trade clauses in before and after entering into employment contracts after a recent decision in the Supreme Court of New South Wales ordered former business owners to pay damages in excess of $500,000 for breaching restraint of trade clauses.

The Plaintiff in the proceedings offered media and advertising services to large-scale clients, in particular in had two major clients. The business was effectively run as a family enterprise until it was acquired by a large corporation – Adorp Australia for $4 million. (‘the Company’).

As part of the transaction, David Andrews and his son Dean  (‘the Employees’) retained employment contracts, which were categorised as ‘Executive Service Agreements’. The Agreements contained inter alia, restraint of trade and non-compete clauses (‘the Employment Agreements’).

Both Employees ended their employment with the Company in July 2010, conveniently at a time when the Company had just lost the two major clients. The dire effect of losing these clients meant that the Company ceased to trade in August 2010.

The Company instituted proceedings seeking relief including but not limited to; account for profits and damages on the basis that the Employees had breached their Employment Agreements and their fiduciary duties owed to the Company.

The Company also sought relief against one the Employee’s Wife and three other companies for accessorial liability.

Whilst some of the Defendants settled with the Company, proceedings against Dean and his Wife, Danielle and Smart Retail Pty Limited (“Smart Retail”) continued.

Ultimately, the Court found that between period of employment and the period of cessation, Dean was in breach of not only his contractual duties to the Company, but to his Statutory and fiduciary duties owed to the Company as an employee under sections 182 and 183 of the Corporations Act 2001 (Cth) as a result of diverting client work to a related entity.

Further, the Court found that post employment; he had breached his non-compete and restraint provisions by undertaking work for one client.

The Court held that where an employee maintains a relationship with a significant client, then it is open for a company to protect its interests. It common practice for businesses to include restraint of trade clauses and non-compete clauses in employment contracts so as to protect their interests, provided that it complies with the Restraints of Trade Act 1976 (NSW).

What you should do?

This decision reiterates the importance of implementing and maintaining policies and procedures to protect your business and its clients. Businesses should constantly review strategies that they have adopted in order to mitigate such risks.

When approaching these issues, businesses should be minded to examining the situation from a commercial and legal perspective.

Fundamentally businesses should be aware that an employee should:

• not to act in his or her own personal interests where there is a real conflict between the pursuit of those interests and performance of duties owed to the employer;
• not to undertake engagements which involve duties which are in conflict with duties owed to the employer; and
• not to misuse the position of employment to pursue a personal gain.

Where a business owner observes fundamental breaches they are entitled to take reasonable steps to protect and enforce its interest before and after cessation of employment. This may include reducing contact with key clients and playing a more active role in the business and ultimately enforcing restraint of trade and non-compete clauses.

Find out how we can assist your business in protecting and or enforcing its rights in situations like this by contacting Steve Brown 1300 882 032 email sbrown@etiennelaw.com.