Barbara Buckett and Associates Barristors and Solicitors

trendz - our client newsletter

may 2007

are restraint of trade clauses enforceable?

An action between Fuel Expresso Limited and Victor Hsieh has revisited the law on employment agreement restraint of trade provisions. Fuel operates ten mobile espresso carts throughout Wellington City. Mr Hsieh was a former employee of Fuel who, after resigning, set up in business for himself operating a coffee cart named "Beangrinding" within 70 metres of the Fuel premises in Wellington.

Employment Court declines to enforce restraint

Fuel claimed that Mr Hsieh was in breach of a restraint of trade clause in his employment agreement and sought an interim injunction from the Employment Court to enforce the clause. The Employment Court declined the application on the grounds that no extra consideration had been given in the employment agreement in exchange for the restraint of trade. Fuel appealed the decision.

what did the restraint cover?

The restraint of trade prevented Mr Hsieh from working in a similar competing espresso bar/café business within a 100 m radius of a Fuel operation or setting up a similar competing business within 5km of an existing Fuel operation within three months of leaving the employment of Fuel. In support of its claim Fuel gave evidence that it offers training programmes to employees and is therefore vulnerable to employees setting up in competition using the skills they have been taught and with the knowledge they have of Fuel’s modus operandi. It claimed Mr Hsieh had benefited from the training he had been given by the company and he had significant knowledge about how Fuel operated. There was also evidence that Mr Hsieh had attracted former Fuel customers to his new cart.

what the Employment Court said

In declining to order an interim injunction in favour of Fuel the Employment Court felt constrained by precedent that held extra consideration in an employment agreement is a prerequisite for an enforceable restraint of trade. The Employment Court said the consideration can either be set out expressly, such as an amount of dollars expressly being paid to buy the restraint of trade from the employee, or it can be by extrinsic evidence, or, thirdly, it can be reasonably inferred from the agreement. The Employment Court found there was no express provision giving such consideration and neither could it draw any appropriate inference of any extra consideration being given. Accordingly the Employment Court held there was no arguable issue of law raised to support an injunction.

Court of Appeal disagrees

On appeal the Court of Appeal found that extra consideration need only be paid where the restraint of trade clause was a subsequent variation. The restraint of trade agreed by Mr Hsieh and Fuel was included in the employment agreement entered into at the beginning of the employment relationship and needed no extra consideration for the clause to be enforceable.

a promise is a promise

The Court of Appeal observed "that the traditional definition of consideration requires that there be "something of value" which must be given, and that consideration is either some detriment to the promisee or some benefit to the promisor." It went on to say the law does not enquire into the adequacy of the consideration or require an extra "premium" for a restraint of trade clause. On this point the Court noted it is also a very well settled principle of contract law that even mutual promises can be consideration for each other. In other words a person who makes a commercial promise expects to have to perform it and correspondingly, one who receives such a promise expects it to be kept.

On these grounds the Court of Appeal upheld the appeal and granted the interim injunction against Mr Hsieh to cease business in conflict with the restraint of trade he had agreed with Fuel.

why have a restraint clause?

As evidenced by the Fuel case, restraint of trade clauses are common in employment agreements where there is a risk that an employee might leave to work for another competing business or set up business on their own account in competition with their former employer. Such clauses typically place a restriction on other employment or business activity in competition with the employer for a defined period and within a certain location after the employment ends. However a restraint of trade cannot be used simply to avoid competition. For the restraint to be enforceable there needs to be something that the employer wishes to be protected, such as trade secrets, business systems and client lists that if known could be of value to a competing employer or the employee if they set up in business. It is also important that the restraint of trade be reasonable and not unfairly restrict the employee from making a living after leaving their job. Consideration must therefore be given to things such as the scope of activity the restraint covers, the time it will apply for, and the geographic location the restriction applies to. If the period and geographic to which area the restriction applies are considered reasonable, and the activity covered by the restraint is closely defined, then it is more likely the restraint of trade will be enforceable.

still enforceable if employment agreement not signed?

Restraint of trade provisions can also be enforceable if an employment agreement has not been signed. In an Employment Relations Authority case involving Maccaferri NZ Ltd, an employee resigned to take up employment with a competitor. Maccaferri sought a compliance order requiring the former employee to comply with a restraint provision that prevented him from working for a competitor in New Zealand for six months after the termination of his employment. The employee argued that he never signed the employment agreement and that the restraint of trade clause was illegal and unenforceable. But the Authority found that because the employee worked for Maccaferri for a year, he had accepted the terms of the unsigned written employment agreement. The Authority also found that the employee had developed the knowledge and experience that made him attractive to his new employer solely from his employment with Maccaferri. It decided that six months was a reasonable duration for the restraint and it was also reasonable to cover the whole of New Zealand.

more information and help

Restraint of trade clauses can be important protections for employers but care must be taken to ensure they are enforceable. If you are interested in learning more about this area or want to include a restraint of trade provision in an employment agreement then you should contact us for help.

send to a friend

Know someone who might find this article useful? Send this page to a friend.

Want to be kept up with the play on employment law? Subscribe to our newsletter trendz.

Disclaimer: This article is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication. Please refer to our Legal Notices.