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Employment Law News | April 2016

The right to work after you leave a job can be a vexed question. Employers and employees (and some independent contractors) query the effectiveness of post-employment restraints as these restraints effectively seek to stop people from working in their chosen field. Just how effective are these restraints in employment contracts and other contracts of engagement, especially when an employee has not complied with its obligations under the contract?

The principal considerations when determining the appropriateness of a “restraint of trade” clause in a contract are:

  1. the reasonableness of the clause in its time and area restrictions, and
  2. whether the clause is seeking to protect the legitimate business interests of the employer/contractor.

But what happens where an employer has “repudiated” the employment contract, by acting in a way which triggers the termination of the contract. In such a case can the employer then seek to enforce the restraint of trade clause?

This question was considered in the case of Richmond v. Moore Stephens Adelaide Pty. Ltd. [2015] SASCFC 147 [Richmond]. In this case the employer Moore Stephens purchased the accounting practice (or a part of it) of Mr Richmond. The purchase price was dependent on the level of fees achieved from the purchased business for the first 3 years. Mr Richmond and others were not to solicit the clients of the purchased business or the clients or employees of Moore Stephens for their own gain.

Mr Richmond claimed Moore Stephens failed to comply with its obligations under the agreed terms of their contract in payment of correct amount for the fees/purchase price, and in doing so, he claimed Moore Stephens had repudiated the contracted and this justified the termination of the contract.

Moore Stephens successfully sued Mr Richmond in the District Court for failing to comply with the restraint clauses under the contract, and Mr Richmond appealed that decision.

The Supreme Court found that the alleged conduct of Moore Stephens in failing to pay component for the correct interest on the purchase price for Mr Richmond’s business was not a breach of an “essential” term of the contract between the parties and therefore did not equate to a “repudiation” by Moore Stephens or justify a termination of the contract, and therefore the restraint clauses survived the conduct of Moore Stephens.

The court's conclusion provided a helpful summary of the law on this point: that there can be no general rule that once a contract is properly repudiated and terminated, that the restraint of trade clauses are then necessarily overwritten. The Court said that the survival of restraint clauses will depend on the “proper construction of the contract” [at 210] and the intention of the parties in entering the contract whether those restraint clauses should survive a termination of the contract.

The lesson to be learned from this decision is that the courts will not necessarily waive restraint of trade clauses where an employer repudiates or breaches a contract and/or the contract is terminated. To ensure the enforcement or otherwise of restraint clauses will require strong wording to carefully articulate the intentions of the parties prior to signing the contract.

Forum Law can advise and assist you with employment issues and consideration of terms in existing contracts. Call us on (02) 9560 3388 for an obligation-free phone chat for up to 30 minutes – or make a time to visit us in Leichhardt.

Forum Law is an active member of several reputable law and industry associations. We have recently obtained ISO9001 accreditation.