The Supreme Court of New South Wales ('the Court’) has issued an interim injunction to prevent two senior brokers in the marine insurance industry from working for a direct competitor of their former employer, pending a full hearing on the enforceability of the restraint of trade clauses contained in their employment contracts.

The two respected insurance brokers (‘the Insurance Brokers’) together held decades of experience in the marine insurance industry, and in February 2009 had signed renewed employment contracts (‘the Contracts’) following the acquisition of their employer (‘the Former Employer’). The Contracts each contained a restraint of trade clause which purported to prevent the Insurance Brokers from working for competitors within the insurance industry, for up to three years after leaving the employment of the Former Employer (‘the Restraint Clauses’). The Restraint Clauses also sought to prevent the Insurance Brokers from soliciting clients, contractors, suppliers or other customers of the Former Employer, or from engaging any employees of the Former Employer.

On 9 March 2012, the Former Employer wrote to the Insurance Brokers advising them that their positions had been earmarked for redundancy in September 2012, and directing the Insurance Brokers to take gardening leave for the duration of the seven months leading up to the termination of their employment (‘the First Letter’). The First Letter cautioned the Insurance Brokers against commencing employment with a competitor in the insurance industry and contacting the clients of the Former Employer throughout the period of gardening leave. On 10 September 2012, the Former Employer sent a further letter to the Insurance Brokers, again reminding them of their contractual Restraint Clauses. The following day, the Insurance Brokers each received final settlements of over $170,000, part of which represented their redundancy entitlements.

On 12 September 2012, a direct competitor of the Former Employer (‘the Competitor’) announced via its website the appointment of two insurance brokers which it claimed were “second to none amongst marine insurance brokers in Australasia”. On the same day, the Former Employer was advised by two key clients that they would be taking up insurance policies with the Competitor. Following a threat by the Former Employer to commence legal action, the Insurance Brokers provided undertakings not to solicit clients, customers, contractors or employees from the Former Employer. However they did not undertake to cease employment with the Competitor.

Justice Nicholas of the Court found that the correct approach in determining applications for injunctions is “to grant the injunction unless there are good reasons to the contrary.” Notwithstanding the evidence led pertaining to the limited employment prospects and financial obligations of the Insurance Brokers, the injunction was granted in order to provide interim protection for the legitimate business interests of the Former Employer, who would be “exposed to the probability of loss of custom and goodwill attributable to [the Insurance Brokers’] force of attraction in the marine insurance industry whilst they are working or a competitor.”

Carefully drafted restraint of trade clauses can be a powerful means of protecting a business’ hard-earned goodwill, and Justice Nicholas in this case articulated that “the means of power of attraction is a protectable component of goodwill.” The Competitor’s announcement concerning the appointment of the Insurance Directors was seen to amount to “a public appeal and promotion calculated to attract clients”, which the Insurance Brokers had not sought to distance themselves from.  Given that the potential damage to the Former Employer arising through the Insurance Brokers’ breaches of their respective Restraint Clauses “may not be compensable in damages”, the grant of an interim injunction pending a full determination of the enforceability of the Restraint Clause was held to be appropriate in this case.

Notwithstanding that restraint of trade clauses will not be enforceable where they are not reasonably required to protect an employer’s legitimate business interests, it is crucial for employers to develop clear restraint clauses as an insurance policy to prevent any potential conflict with departing employees, particularly those who have had unrestricted access to client and contractor lists.

For further information on drafting clear and enforceable restraint of trade clauses, please contact Nick Stevens, Victoria Sales or Liza Isho.

Author: Nick Stevens, Principal, Stevens & Associates Lawyers, an AIIA.biz expert and one of the Panel of Expert Bloggers.

This article provides general information only. It is not legal advice, and is not a substitute for legal advice. Specific advice should be sought to take into account your particular circumstances. Stevens & Associates Lawyers is a boutique industrial relations and employment law firm. It has liability limited by a scheme approved under Professional Standards Legislation.

In employment law, the restraint of trade clause can be seen as an employers' ultimate insurance policy.

Like all good TV courtroom dramas, the case of Seven Network Limited v. James Warburton had a clear winner – the business managers who may take from this decision important lessons on the value of restraint of trade clauses in employment contracts and equity incentive plans.

This high-profile matter revolved around Channel Ten’s poaching of Seven Network’s esteemed Chief Sales and Digital Officer, James Warburton. Seven argued that the restraint of trade clause contained in a Management Equity Plan prevented him from taking up employment with the rival station until October 2012, whereas Mr Warburton wanted to start in 2011 at the end of his fixed term contract. After considering both parties’ evidence and arguments, his Honour Mr. Justice Pembroke of the Supreme Court of New South Wales determined that Warburton could commence at Ten on 1 January 2012.

Restraint of trade clauses protect confidential, company-specific information by limiting the ability of former employees to take up employment with a rival organisation immediately after leaving their former employer. Without such a clause, employees are free to use business plans, client lists, pricings and new product development information from their former employ, and it is very hard for the former employer to prove that this sensitive information has been used against them.

Although employers can rely on the implied term of confidentiality, sometimes this protection is inadequate, particularly where employers have had unrestricted access to customers and clients. Well-drafted restraint of trade clauses act as an insurance policy for the employer, and developing clear restraint clauses is to be encouraged in all businesses. In particular, restraint of trade clauses are vital for employers who employ staff in risk areas of the business, who may have the potential to affect the business’s goodwill. By clearly defining the responsibilities of both the employee and the employer, restraint clauses make it easy to demonstrate a breach of a formal agreement, and in this way they are a simple but effective means of minimising the potential for conflict.

Arguably the most important lesson for employers to take from the Warburton decision is that clauses purporting to restrict the trade of an employee will only be enforceable if they are necessary for the reasonable protection of the legitimate interests of the employer. Mr. Warburton successfully argued that imposing a twelve month restraint of trade clause on top of the balance of the unexpired term of the employment contract was unreasonable, because it would result in him being quarantined from Seven’s confidential information, without being able to take up his CEO position with Ten, for more than nineteen months. Justice Pembroke read down the restraint to its lowest denomination, namely three months.

Employees, particularly senior employees, are a vital resource and part of any business. Adequate post-employment protection of senior employees makes a good business even better from a business case risk perspective.

Author: Nick Stevens, Principal, Stevens & Associates Lawyers.

Stevens & Associates Lawyers has provided advice to many businesses on how restraint of trade clauses can protect sensitive business information and prevent future conflicts. 

Disclaimer:  This article provides general information only.  It is not legal advice, and is not a substitute for legal advice.  Specific advice should be sought to take into account your particular circumstances.  Stevens and Associates Lawyers is a boutique industrial relations and employment law firm.  It has liability limited by a scheme approved under Professional Standards Legislation.