When the Chicken has Flown the Coop - Restraints of...

30 JAN 2020


When the Chicken has flown the Coop - Restraints of Trade & Breaches of Confidentiality

Businesses are often faced with issues surrounding the departure of their employees, their business partners and third party consultants. There are often significant concerns about confidential information accessed by persons involved in the business in the course of their engagement that may become detrimental to the business upon their departure.

This information could include:

  1. Client, contact, and third party provider lists.
  2. Sales strategies, market research, product information and product performance details.
  3. Information concerning methodology of calculation of profits and margins including pricing information.
  4. Terms of employment for employees.
  5. Training documentation of employees. 

Naturally, in a competitive commercial environment, employment, partnership and consultancy contracts often include clauses restraining trade and preserving the confidentiality of information obtained during the course of their involvement with the business.  These clauses are restrictive contractual provisions or covenants that could arise in employment agreements, consultancy agreements, partnership agreements and sale of business agreements. They could involve restrictions on working for a competitor or dealing with clients and other former employees and providers as well as governing the treatment of confidential information obtained during the course of their involvement with the business. However, the question of enforcing those clauses can be a tricky one.

For example, the confidentiality of the information is often difficult to determine. Some information will not be protected by a Court without validly drafted clauses, as that information may be part of the employee’s ‘know-how’ or intrinsic to the performance of his/her duties. Other information may not be protected if it is trivial in nature or is freely available in the public domain. A Court will look at factors such as the extent to which the information is known outside the business, the skill and effort required to collect the information, the value of the information to competitors the ease/difficulty of duplication of that information by others, and usages and practices in the industry.

Another issue to be considered is the degree of connection of the employee to the customers of the business. That connection may form an important part of the goodwill of a business. Where an employee has formed close personal connections with customers that will allow him/her to leverage those connections in a new position, to the detriment of the former employer, an argument that a restraint is enforceable may be very persuasive.

It is important to note that in New South Wales restraints of trade are governed by legislation. The Restraints of Trade Act 1976 permits a Court to “read-down” or adjust a restraint in line with public policy. The Court has quite a wide discretion under the Act to adapt the restraint of trade clause, not only to “read down” but to modify time period or geographic area to bring it in line with what the Court considers reasonable.  However, the Court will not remake the contract or covenant entirely.

It is also important to note that if an employee, business partner or a consultant flies the coop that appropriate checks and balances are adopted to ascertain what information that is confidential to your business they may have taken with them and to consider protecting that information if it is important to your business.

What needs to be considered

  1. The determination of the validity of the restraint as applied to the circumstances will depend heavily on those circumstances. 
  2. The Court will look to afford adequate protection to the party who imposes the clause.
  3. The Court will protect legitimate interests of a proprietary nature only rather than merely preventing competition in a commercial marketplace. 
  4. The onus will be on you to prove the reasonableness of the restraint to the Court. 

When dealing with parties that have ‘flown the coop’, care and caution is needed as is appropriate urgency. Should there be any indication of behaviour amounting to a breach of confidence or restraint provisions in an employment contract or business agreement, the sooner you act, the better. Our Dispute Resolution Team at Marsdens Law Group can assist with any issue concerning the interpretation and enforcement of restraints. This may range from simple advice on the basis of the documentation, negotiating a resolution, or handling an urgent litigated dispute, including urgently applying to the Court for injunctive relief. 

For further information on our Dispute Resolution services, please contact Aaran Johnson or Grant Butterfield on 02 4626 5077.

The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.

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