Which case won?

casea
The case for the employer
  • The restraint of trade clause was critical to our business for the protection of confidential information, which the CFO had access to in her senior financial role.
  • The restraint clause was reasonable and was not too broad. It did not restrict the CFO from employment in a position to which our confidential information was irrelevant, nor from working in businesses that do not compete with our company. Further, it did not extend to the retail industry at large, or any other industry.
  • The CFO was hardly a naïve or uneducated candidate who did not understand the contract she signed. She agreed in the contract that the restraints were no more than were necessary to protect our legitimate interests.
  • Prior to signing the employment contract, the CFO was able to access legal advice and negotiate better terms and conditions. However, she chose not to amend the restraint clause.
  • The stipulation that the CFO would not work for 50 specified companies was reasonable, as all but one are clothing retailers in one form or another.
  • In any event, if the court finds that the restraint clause is too broad, it should “read down” the clause by interpreting it in a way which limits its meaning to things which are reasonable for our company’s protection, or by “severing”, ie removing parts of the clause which are too broad while leaving the rest of the contract intact.
caseb
The case for the CFO
  • The restraint clause is wildly in excess of what is necessary to protect my former employer’s legitimate interests.
  • The restraint clause would prevent me from performing activities in my new role such as preparation of year end accounts, bank debt refinancing and attending board meetings – none of which involve activity in competition with the speciality brand and fashion business of my former employer.
  • According to the text of the contract, the restraint clause prevents me from being employed by any retailer of clothing or stationery, which is absurd.
  • The period of the restraint is unreasonable. Because of the six month probationary period, I could be dismissed after three months and then shut out from the industry nationwide for two years, or a minimum of 12 months.
  • The restraint clause prevents me from working for 50 major Australian companies, many of them large enterprises with diverse activities, in any capacity whatsoever, including menial work such as checkout or counter work which I would be unlikely to seek or accept, given my role as a finance executive.
  • For these reasons the restraint provision is so broad as to be unenforceable and should be struck down.

So, which case won?

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Case A Case B

Case B won. You were right!

How people voted
a41%
b59%

Expert commentary on the court's decision

Geoff BaldwinConsultant Lawyer
“The moral for employers in this case is that draconian restraint clauses may not merely be ineffective, but may well backfire by leaving you less protected than you might have been otherwise.”
Victorian Supreme Court finds in favour of employee

In the case Just Group Pty Ltd v Peck [2016] VSC 614, the Supreme Court found in favour of the employee, Ms Peck.

The decision aligned with the position under the common law that a restraint of trade provision which is unreasonably wide will be held to be unenforceable, and that courts will not “rewrite” a contract provision of this kind so as to reduce it to an enforceable ambit.

Because of this, the restraint defined in “Resricted Activities – Personal Engagement”, which was unreasonably wide, was not enforceable. Also, the “cascading” provisions allowing a court to shorten the restraint time, or to reduce the geographic area of the restraint, did not help the employer, Just Group Pty Ltd.

The court rejected Just Group’s arguments that provisions in the contract could be severed, saying that the provisions in question were not severable and, even if they had been, severance is a discretionary matter. The judge said that in any case, he would not have exercised that discretion.

Furthermore, although a provision of the employment contract said in essence that the employee agreed that the post-employment restraints were not more than were necessary, if a court is satisfied that in a restraint provision is too wide, that consideration will usually override a statement to the contrary in the contract. That is indeed what happened in this case.

Employer’s possible motivation in taking legal action against former employee

It might be inferred that Just Group might not have gone as readily to litigation had Ms Peck been a loyal and long-serving executive who was simply ripe for a change of scenery.

Instead, she had quit a bare four months after starting work, at a salary considerably higher than that offered to her at the start of the contract negotiations, and had not disguised the fact that contrary to another provision of her employment contract, she had been in covert talks with the competitor, Cotton On, while still working for Just Group.

One of Just Group’s executives gave evidence that the group had brought Ms Peck “in from the wilderness”, by which he meant that she was being given a new chance in apparel retail after not doing so well elsewhere; so it may well have been that Just Group thought Ms Peck had bitten the hand that had fed her.

Beware including excessive restraint clauses in employment contracts

The moral for employers here is that draconian restraint clauses may not merely be ineffective, but may well backfire by leaving you less protected than you might have been otherwise.

Generally, courts will rule excessive restraint clauses unenforceable, so that the whole clause is struck down. This means that the employer is stripped of any protection at all against competition or poaching by the former employee.

Excessive clauses will in general not be saved by accompanying provisions saying that the employee agrees that the restraints are reasonable. “Cascading” clauses can be useful, but it needs to be remembered that these generally only operate so as to reduce the period or area during which the restraint applies.

If the restraint itself is excessive, cascading clauses will not help. And courts are most unlikely to “sever” offending provisions of the restraint clause.

Outcome may have been different if case had been heard in NSW

The action brought by Just Group was heard on the basis that the laws of Victoria applied, meaning that the tests used by the common law applied.

However, in NSW, section 4 of the Restraints of Trade Act 1976 allows a court to ignore the fact that a restraint goes beyond what is reasonable, permitting the court to enforce a restraint to the extent that it is reasonable, but no more than that.

However, this is still a matter for the court’s discretion, so the prudent course is to exercise restraint in drafting post-employment restraint clauses.

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