Attempt to enforce restraint of trade clause fails due to unreasonable restraint period…

The Employment Relations Authority has rejected an employer’s application to enforce a restraint of trade clause that would have prevented a former employee from commencing employment with a competing business.

The employer brought this application to the Authority after the employee informed them that he had accepted employment at a competing business and had signed an employment agreement. This led to the employer lodging a complaint to the Authority in an attempt to enforce a restraint of trade clause that was contained in their employment agreement with the employee.

The Authority had to decide firstly whether there was a proprietary interest that required protection. The Authority came to the conclusion that there were certain proprietary interests that could require protection from a restraint of trade clause. This information included client connections, growth strategies, and more general confidential business information.

The Authority then had to decide whether the 12 month term for the restraint of trade clause was reasonable. The Authority found that this was an unreasonable length of time for the restraint of trade clause to be in force. The restraint of trade clause should only have been for a term necessary to protect the interests of the employer. The Authority decided that 12 months was in excess of what was reasonably required for the employer to protect their proprietary interests, and that it therefore was not enforceable against the employee.

The Authority decided that because the restraint of trade clause would not have been enforceable due to an unreasonable time frame, the employer could not stop the employee from commencing employment with a competing business.

Usually, when an application for the enforcement of a restraint of trade clause is brought to the Authority, a decision will be made as to a reasonable time frame. The Authority will then order the employee to refrain from working for the period of time that is deemed to be reasonable.

In this case, the reasonable amount of time for the restraint of trade clause had already lapsed, as the proceedings took place 4 months after the employee’s resignation. This meant that the Authority could not reasonably enforce the restraint of trade clause, as any reasonable time frame that could have been applicable would have already lapsed.

The Authority dismissed the application, allowing the employee to commence work for the other business.

It is likely that there may be a further claim by the employer to the Authority to seek compensation, but this was not the subject of this particular proceeding.

If there is confusion regarding what constitutes an enforceable restraint of trade clause, it is wise to seek advice from a professional with experience in the area.

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Alan Knowsley and Matthew Binnie