In the recent case of Just Group Limited v Peck [2016] VSCA 334 the Supreme Court of Victoria Court of Appeal (the Court) adopted a restrictive approach to restraints of trade in the context of employment contracts.
Just Group Ltd (JGL) was appealing the decision of the Supreme Court of Victoria in Just Group Ltd v Peck [2016] VSC 614, in which JGL’s restraint of trade with ex-employee Nicole Peck was struck out. Appellate Justices Beach, Ferguson and Riordan dismissed the appeal, allowing Ms Peck to begin her appointment with her new employer, Cotton On Group.
For some context and background on the proceedings, see Pointon Partners’ update on the Supreme Court’s judgment at first instance.
The grounds of appeal
The Court had to consider the following issues:
- Whether the first and second limbs of the Ms Peck’s restraint of trade were reasonable and therefore enforceable; and
- Whether the list of competing brands in Annexure A of the employment contract could be severed.
The law
The Court’s judgment involved a reiteration of the law governing restraints of trade. First and foremost: a restraint clause is presumed to be void as matter of public policy. This presumption is rebutted if the party relying on the restraint can demonstrate that it is reasonable as between the parties and not unreasonable in the public interest.
(a) Construing a restraint clause
For a restraint clause in an employment contract to be valid it must be imposed to protect a legitimate interest of the employer and do no more than is reasonably necessary to protect that legitimate interest in both its duration and extent. Recognised legitimate interests include confidential information, trade secrets and employers’ customer connections.
The Court noted that the ultimate decision in relation to a restraint of trade in employment contracts depends on way in which it is construed. A court will construe the restraint according to the objective intentions of the parties, in light of the following principles:
i. The restraint clause should be construed in with regard to the facts of each case and the surrounding circumstances;
ii. Where there is ambiguity, the court’s construction should favour the employee;
iii. An unduly wide clause should not construed restrictively in order to preserve its validity; and
iv. In general, restraint clauses in employment contracts receive greater scrutiny from the courts than those in general commercial contracts (e.g. a sale of business agreement).
(b) Severance
In certain circumstances, courts have the power to sever part of a restraint clause in order to make it valid. On this point the Court noted that part of a restraint clause can be severed where it is found that the clause is made up of not one single covenant, but multiple covenants. However, this does not allow a court to rewrite restraint clauses – a covenant can only be severed when it can be removed from the clause without changing any other part of the clause. Further, if that part of the restraint that is sought to be severed is unreasonably broad or in an indiscriminate form, it is unlikely that a court will sever it.
Application of the law
(a) The first limb
Put simply, the first limb of the restraint clause restricted Ms Peck from being involved in any activity that was the same as or similar to any activity which was part of the JGL businesses. The Court interpreted the words ‘the same or similar to’ as limiting the businesses with which Ms Peck was prevented from engaging with to businesses in competition with JGL.
In effect, the first limb prevented Ms Peck from using confidential knowledge obtained in her role a JGL in a job with another company where that knowledge would be irrelevant. In its submissions, JGL argued that this limb should be construed as referring to ‘any part of [JGL’s] relevant businesses’ and ‘in respect of which [JGL’s] confidential information would be relevant’, so that it’s application was narrowed sufficiently for it to be enforceable. However, the Court rejected these submissions on the basis that this construction would require the Court to rewrite it, which is impermissible.
(b) The second limb
The second limb of the restraint clause restricted Ms Peck from being involved in any activity for any of the entities operating from the brands listed in Annexure A of the employment agreement, which were all brands competing with JGL. As with the first limb, the second limb prevented Ms Peck from being employed with a large number of entities in which the confidential information obtained in her role as CFO of JGL would not be relevant.
JGL submitted that the second limb could be construed so as to apply only to each entity insofar as they operated apparel and stationery brands. The Court rejected this argument for the same reason that it had rejected JGL’s submissions on the first limb: it is not permissible to rewrite the restraint clause to preserve its validity; rather, the Court had to give effect to the objective intentions of the parties.
(c) Whether the second limb could be severed
JGL was successful in establishing that confidential information obtained by Ms Peck during her employment with JGL was relevant to a job with four of the brands listed in Annexure A. However, JGL went no further than this: no evidence was adduced to establish that the same could be said of the remaining 46 brands. The Court held that to severe all but four of the fifty covenants in Annexure A would, in essence, be to make a new agreement for the parties, which was plainly not justified.
Further, the Court interpreted the phrase ‘any of the entities operating from the brands listed in Annexure A’ as meaning ‘no matter which of the entities’. This meant that the brands listed in Annexure A formed one single covenant, rather than fifty distinct covenants, so the Court could not sever any number of the brands from the list in Annexure A.
Implications
This case demonstrates the ramifications of drafting a restraint clause in broad and uncertain terms. Employers cannot draft unduly wide restraint clauses in the hope that, if they are disputed, a Court will simply narrow its scope or sever the invalid parts. Careful drafting of each element of the restraint clause is required in order to ensure that it serves only to protect the legitimate interests of the employer.
Pointon Partners are able to assist with the drafting, review and amendment of employment contracts.
If you have any queries in relation to restraints of trade or employment law generally, please contact Michael Bishop or Lachlan Chisholm.
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