To solicit, or not to solicit, that is the question…

To solicit, or not to solicit, that is the question…

And so might a metro 21st century Hamlet ponder if he were a mortgage broker ceasing work with one mortgage broking business and starting work with a competitor mortgage business.

 “Should I, can I, will I…entice my existing clients to follow me. “

Such a factual scenario was considered recently by the Court of Appeal.   Mr Isaac (Hamlet) was a mortgage broker.  He was an independent contractor at Dargan’s mortgage broking business.   After terminating his work there, he worked with a competitor business, RAMS. Dargan sought to enforce the restraint clauses in the mortgage broker’s contract.

Primary Judge

The primary judge (Sackar J) found that the mortgage broker had breached his confidentiality obligations and restraints (non-solicitation and non-interference) and breached an equitable duty of confidence by using his previous employer’s client list.  The employer was entitled to damages and restraining orders.

Court of Appeal

The NSW Court of Appeal partly allowed Mr Isaac’s appeal (Isaac v Dargan Financial Pty Ltd ATF The Dargan Financial Discretionary Trust (ABN 68 702 047 521) [2018] NSWCA 163 (Bathurst CJ, Beazley P and Gleeson JA).

But the contract says so

“Restraint” clauses are common place in workplace agreements across many industries.  They are typically “non-competition” based (not working in competition with the former employer) or “non-solicitation” based (not actively enticing clients/customers from the former employee).

But it is sometimes news to people (either welcome news or bitter news, depending on their position) that these clauses are not always enforceable, or if they are, in a reduced form to that provided in the contract.   Yes, even if the clauses are squarely put in a written contract they are not necessarily enforceable.

They are only enforceable if they are “reasonably necessary” and Courts often “read down” some or all of a restraint provision.

Given this degree of uncertainty, it is helpful then that the NSW Court of Appeal used the opportunity in its recent case to articulate, in detail, the relevant principles, and indicate how they are to be applied in a particular factual scenario.

Restraints of trade – applicable principles

Common Law 

•  A restraint of trade is contrary to public policy and void unless it is justified by the special circumstancesof the particular case.
• A restraint may be enforced if the restraint is reasonably necessaryfor the protection of the parties concerned and reasonable in the interests of the public.

Legislative position in New South Wales

• A restraint of trade is valid to the extent to which it is not against public policy (s.4 Restraints of Trade Act 1976 (NSW)).

The Applicable Method

The NSW Court of Appeal set out a very helpful explanation of the applicable principles relating to restraint provisions including the method that a Court should take when considering whether they are enforceable.

• First the Court determines whether the alleged breach does or will infringe the terms of the restraint, then the Court determines whether the restraint is contrary to public policy. (Orton v Melman [1981] 1 NSWLR 583 at 587; Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 328; Woolworths Limited v Olson [2004] NSWCA 372 at [42]–[44]; Jardin and Jardin Investments Pty Ltd v Metcash Ltd and Metcash Trading Ltd [2011] NSWCA 409 at [87]).
• Attention is focussed on the actual or apprehended breach, rather than on imaginary or potential breaches: Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9; [2006] NSWSC 717 at [10] (Brereton J).
• The validity of a covenant in restraint of trade is to be judged at the date of its creation but the Court may take into account future events that could have been foreseen (Lindner v Murdock’s Garage at 653 (Kitto J); Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288; [1973] HCA 40 at 318 (Gibbs J); Geraghty v Minter (1979) 142 CLR 177; [1979] HCA 42 at 181 (Barwick CJ)).
• The Court considers matters as at the date of the hearing: Sidameneo (No 456) Pty Ltd v Alexander [2011] NSWCA 418 at [70] (Young JA, Beazley and Basten JJA agreeing); Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852 at [88]; (2008) 175 IR 414 at 440 (Brereton J).
• The nature of the interest meriting protection under a covenant in restraint of trade will differ according to the type of restraint under consideration.
• “Goodwill” is a “rather elusive concept” (Sidameneo (No 456) Pty Ltd v Alexander at [54]).  It is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it (Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at [24]).
• A stricter and less favourable view is taken of covenants in restraint of trade between employer and employee than in commercial agreements.  Four reasons are given for this by JD Heydon (The Restraint of Trade Doctrine (4th ed, 2018).  First, the inequality of bargaining power between the parties. Second, the employee may be giving up that employee’s only asset, which depends on specialised training and which may not be at all negotiable. Third, when labour is hired it remains valuable whether or not the employee later competes. Fourth, once the employee accepts the post-employment restraints, the employer’s power during the contract is much increased by reason of the inhibition on the employee’s ability to threaten to leave and seek work elsewhere
• The principles relating to covenants in restraint of trade apply to relationships between contractor and principal.  The stricter, less favourable view of a restraint of trade in employment cases, compared to commercial arrangements, should be applied to independent contractor relationships (Winnipeg Livestock Sales Ltd v Plewman [2000] 192 DLR (4th) 525 at [24], the Manitoba Court of Appeal).

Take home 

Whether you are Hamlet, or the State of Denmark, you should consider the effect of “restraints” at the time of contractual formation, during the relationship and at the end of a workplace relationship.

Despite express restraint provisions in a contract, they are not always enforceable, and if so, in a more watered down format.

This might be music to the ears of employees but should sound as a warning to employers in terms of the resounding competitive reality that grounds business policy and law in Australia.