Restraint of Trade
157 The principles which govern the interpretation and enforceability of restraints were conveniently summarised in Just Group Limited v Peck (2016) 344 ALR 162 (Just Group) by Beach and Ferguson JJA and Riordan AJA at [30]-[36] as follows:
30 A term in a contract, which is a restraint of trade ('a restraint clause'), is presumed to be void as contrary to public policy.
31 The presumption may be rebutted if there are special circumstances that demonstrate the covenant to be:
(a) reasonable as between the parties; and
(b) not unreasonable in the public interest.
32 The test of reasonableness varies depending on 'the situation the parties occupy and so recognising different considerations which affect employer and employee and independent traders or business men, particularly vendor and purchaser of the goodwill of a business'. A court takes a 'stricter view' of restraint clauses in employment contracts; and will more readily uphold a restraint clause in favour of a purchaser of the goodwill of a business than a restraint clause in favour of an employer. In particular, a purchaser of a business is entitled to protect itself from competition by the vendor; but an employer is not entitled to protect itself from competition per se by an employee.
33 A restraint clause in favour of an employer will be reasonable as between the parties, if at the date of a contract:
(a) the restraint clause is imposed to protect a legitimate interest of the employer; and
(b) the restraint clause does no more than is reasonably necessary to protect that legitimate interest in its:
(i) duration; or
(ii) extent.
34 It is well established that employers do have a legitimate interest in protecting:
(a) confidential information and trade secrets; and
(b) the employer's customer connections.
35 For the legitimate purpose of protecting the employer's confidential information, a restraint clause does not need to be limited to a covenant against disclosing confidential information. It may restrain the employee from being involved with a competitive business that could use the confidential information.
36 The onus of proving the special circumstances from which the Court may infer 'reasonableness between the parties' is on the person seeking to enforce the covenant. However, if an employee or other covenantor alleges that the restraint clause is against the public interest, the burden of proving that proposition is on the employee/covenantor.
(Citations omitted.)
158 It was further stated in Just Group at [38(c)]:
[G]enerality does not constitute ambiguity. Accordingly, it is not permissible for the Court to approach the construction of a restraint clause by first determining what degree of restriction would be justified; and then reading down an unduly wide clause in order to preserve its validity. The Court may not adopt a restrictive interpretation for the purpose of saving the restraint clause form invalidity.
(Citations omitted.)
159 In Findex Group Limited v McKay [2020] FCAFC 182, Markovic, Banks-Smith and Anderson JJ observed the following at [76]-[87]:
76 The exercise of construction is undertaken for the purpose of ascertaining the real meaning of the restraint, independently of the rules proscribing tests of reasonableness for the purpose of ascertaining its validity: Butt v Long (1953) 88 CLR 476, 487 per Dixon CJ.
77 The Court should approach the task of construction on the basis that the parties intended to produce a commercial result, and one which makes commercial sense: Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640 (Woodside Energy), [35]; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12; 261 CLR 544 (Ecosse Property), [17].
78 A commercial contract is to be construed so as to avoid it making commercial nonsense or working commercial inconvenience: Woodside Energy, [35]; Zhu v Treasurer (NSW) [2004] HCA 56; 218 CLR 530, [83]; Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310, 313-314.
79 Commercial contracts must be interpreted fairly and broadly, without being too astute or subtle in finding defects: Pan Foods Company Importers and Distributors Pty Ltd v Australia and New Zealand Banking [2000] HCA 20; 170 ALR 579, [14]; Australasian Performing Right Association, 109-110.
80 A construction that avoids unreasonable results is to be preferred to one that does not, even though it may not be the most obvious, or the most grammatically accurate: Australasian Performing Right Association, 109-110.
81 Determining the meaning of a contractual term normally requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165, [40] (Toll); Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; 218 CLR 451 (Pacific Carriers), [22]; Woodside Energy, [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 256 CLR 104 (Mount Bruce Mining), [47] and [49]-[50]; Ecosse Property, [17].
82 Words may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency: Fitzgerald v Masters (1956) 95 CLR 420, 426-427.
83 In deciding whether there are special circumstances justifying a restraint of trade, the Court should be wary of placing weight upon "improbable and extravagant contingencies as indicating the restraint to be unreasonable": Adamson v NSW Rugby League Ltd (1991) 31 FCR 242, 286 per Gummow J citing Haynes v Doman [1899] 2 Ch 13, 26.
84 Agreements in restraint of trade, like other agreements, must be construed with reference to the object sought to be attained by them. The object is the protection of one of the parties against rivalry in trade. Such agreements cannot be properly held to apply to cases which, although covered by the words of the agreement, cannot reasonably be supposed ever to have been contemplated by the parties, and which, on a rational view of the agreement, are excluded from its operation by falling, in truth, outside and not within its real scope: Haynes v Doman [1899] 2 Ch 13, 26.
…
86 The preferred approach is to have regard to the object and intent of the parties and read down a restraint of trade to give effect to that object and intent: Rentokil, 339; Koops Martin v Dean Reeves [2006] NSWSC 449, [40]; cf. Geraghty v Minter (1979) 142 CLR 177, 180.
87 A construction which will preserve the validity of the contract is to be preferred to one which will make it void: Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111; 205 FCR 187, [45].
160 To uphold the restraint clause, it is not enough for Luvalot to point to clauses in her contract of employment concerning the non-disclosure of confidential information as sufficient to protect the interests of Luvalot. As explained by Brereton J in Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9 at [13]:
And as Lord Denning MR said in Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 at 1479, [1978] 1 All ER 1026 at 1033, experience has shown that it is unsatisfactory simply to have a covenant against disclosing confidential information, because it is difficult to draw the line between information which is confidential and information which is not, and very difficult to prove a breach when the information is of such a character that an employee can carry it away in his or her head, so that the only practicable solution is to take a covenant from the employee by which he or she undertakes not to work for a trade rival. The permissibility of such restraints for that purpose is well established.
(Citations omitted.)
161 In Liberty Financial Pty Ltd v Jugovic [2021] FCA 607, Beach J, at [194]-[198], applied with approval, the above statements of principle in Just Group.
162 It was not contested that Ms Dong was employed in Luvalot's Sydney office commencing 31 July 2012 and ceasing employment with Luvalot on 7 February 2017. Ms Dong signed the contract of employment and accepted the offer of employment in Sydney. Under s 2 of the Restraints of Trade Act 1976 (NSW) (RT Act) "restraint of trade" is defined as, inter alia, one created by contract. Section 3 of that Act excludes its operation from some contracts (such as those entered into before the Act's dated assent) but none apply to Ms Dong's contract of employment.
163 Under s 4(1) of the RT Act, a restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not.
164 The relevant legal principles governing restraint of trade were summarised by Perry J in De Belin v Australian Rugby League Commission Limited [2019] FCA 688 at [209]-[211] as follows:
209 The starting point is the classic statement by Lord Macnaghten in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company Ltd [1894] AC 535 (Nordenfelt) at 565 that:
The public have an interest in every person's carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraint of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.
210 The statement has been endorsed by the High Court as also representing the law in Australia: Buckley v Tutty (1971) 125 CLR 353 (Tutty) at 376 (the Court); Queensland Co-operative Milling Association v Pamag Pty Limited (1973) 133 CLR 260 (Pamag) at 267-268 (Walsh J); see Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Ltd (1973) 133 CLR 288 (Amoco) at 305-306 (Walsh J) and 315 (Gibbs J); Maggbury Pty Limited v Hafele Australia Pty Limited [2001] HCA 70; (2001) 210 CLR 181 at [69] (Kirby J). As Gleeson CJ, Gummow, Kirby and Hayne JJ held in Peters (WA) Limited v Petersville Limited [2001] HCA 45; (2001) 205 CLR 126 at [37]:
… at least since Nordenfelt, the common law in this field has fixed the appropriate balance between the competing claims and policies generally in favour of striking down restraints unless they can be justified. In this way, and by "a clear rule", there was removed the tendency … "of placing the public policy of securing an ample freedom of contract and enforcing obligations assumed in its exercise in opposition to the public policy of preserving freedom of trade from unreasonable contractual restriction."
(citations omitted)
211 That being so, the relevant principles were helpfully summarised in McHugh v Australian Jockey Club Ltd [2014] FCAFC 45; (2014) 314 ALR 20 at [4] (Perram J (Griffiths and White JJ agreeing)) as follows:
(a) at common law all interferences with individual liberty of action in trading and all restraints of trade themselves, if there is nothing more, are contrary to public policy and therefore void: Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company Ltd [1894] AC 535 at 565 per Lord Macnaghten;
(b) such a restraint will nevertheless be valid if:
(i) it affords no more protection than is reasonably necessary to protect the interests of the party in whose favour it is imposed: Nordenfelt at 565; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 315-316 per Gibbs J; and
(ii) it is reasonable having regard to the interests of the public: Nordenfelt at 565; Amoco at 315;
(c) reasonableness in those contexts is to be judged at the date the restraint was first imposed: Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242 at 285-286 per Gummow J; Sheppard J agreeing at 245;
(d) the onus of showing that the restraint is no more than reasonably necessary to protect the interests of the party having the benefit of the restraint is on that party: Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269 at 319 per Lord Hodson; Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 700, 707-708 per Lord Atkinson and Lord Parker. There are judgments of individual Justices of the High Court to similar effect: see Lindner v Murdock's Garage (1950) 83 CLR 628 at 646 per McTiernan J and 653 per Kitto J; Amoco at 317 per Gibbs J;
(e) the onus of showing that a contract in restraint of trade is injurious to the public lies on the party making that allegation: Herbert Morris at 700, 707-708; Esso Petroleum at 319;
(f) what is to be proved in both cases are facts, but the question of whether those facts make good the proposition that the restraint is reasonable is a question of law: Esso Petroleum at 319; Amoco at 317;
(g) in assessing what is reasonable the Court may take into account future probabilities that could have been foreseen: Adamson at 285-286; and
(h) in assessing what is reasonable, facts occurring after the restraint's inception may, but need not, throw light on circumstances existing at the relevant date: Amoco at 318.
165 The approach to the application of s 4(1) of the RT Act was discussed by Bathurst CJ in Belflora Pty Ltd v Vinflora Pty Ltd [2021] NSWCA 178 (Belflora) at [23] as follows:
With this background it is convenient to turn to the grounds of appeal. It seems that the complaint in ground 1 was that the primary judge failed to apply the approach to s 4(1) of the Restraints of Trade Act suggested as appropriate by McLelland J in Orton v Melman [1981] 1 NSWLR 583 at 587: namely, to first determine whether the breach infringes the term of the restraint properly construed, and if so, then to determine whether the restraint as it applies to the breach infringes public policy. If the restraint as it applies to the breach is not against public policy, then by virtue of s 4(1) the restraint is to that extent valid, subject to any order which may be made under s 4(3). This approach has been accepted as correct in a considerable number of cases, including the decision of this Court in Isaac v Dargan Financial Pty Ltd at [61].
166 Brereton JA in Belflora described the application of s 4(1) of the RT Act in the following terms at [44]-[46]:
44 Although at common law a restraint of trade is contrary to public policy and void unless it is justified by the special circumstances of the particular case, in New South Wales a restraint is valid to the extent to which it is not against public policy, even if not in severable terms. The effect of the Restraints of Trade Act 1976 (NSW) ("Restraints of Trade Act") is that, in New South Wales, one approaches this type of case by determining, first, whether the alleged or apprehended breach does or will infringe the terms of the restraint properly construed (independently of public policy considerations); secondly, whether the restraint in its application to that breach is against public policy; and thirdly, if it is not, then in its application to the alleged infringing conduct, the restraint is valid unless the court makes an order under Restraints of Trade Act, s 4(3). That is because the effect of the Restraints of Trade Act, s 4(1), is to require that, for the purpose of determining the validity of a restraint, attention be focussed on the actual or apprehended breach, rather than on imaginary or potential breaches. Thus the essential question is whether the agreement, insofar as it purports to preclude Vinflora and Mr Uppalapti from displaying flowers imported from South America at stands 49, 50, 51, and 52, and from selling flowers imported from South America at those stands, other than flowers supplied by Belflora (being the actual or apprehended breach of which Belflora complains) is void as an unreasonable restraint of trade.
45 The restraint of trade doctrine reconciles two conflicting policies, the first being "that a man should be free to use his skill and experience to the best advantage and should not be put in the position of a slave", and the second that covenants should be observed and enforced. The fundamental principle is that a restraint of trade is not contrary to public policy if it is reasonable as between the parties, and not unreasonable in the public interest, so that while affording adequate protection to the party in whose favour it is imposed, it is not injurious to the public.
46 Whether a restraint is reasonable having regard to the interests of the parties depends on two, albeit related, considerations: first, whether the covenantee has a legitimate protectable interest, and secondly, whether the restraint is no more than reasonable for the legitimate protection of that interest. The identification of a legitimate protectable interest is fundamental; without one, no restraint is reasonable; and where one is established, it informs the extent of what is reasonable to protect it. The legitimate interests which may be the subject of protection by covenant are in the nature of proprietary subject matter, including trade secrets and confidential information, and goodwill including customer connection. It extends to information as to the identity of reliable suppliers, even though not such as to amount to a "trade secret" which would attract equitable protection in the absence of express agreement; and to connection with staff, so that "anti-poaching" covenants prohibiting a former employee from soliciting the employer's staff have been upheld. However, it is well-established that a convenantee is not entitled to protection against mere competition.
167 I respectfully agree with the approach of Bathurst CJ and Brereton JA in Belflora to the application of s 4(1) of the RT Act.