trendz - our client newsletter

june 2007

more on trade restraint clauses

In our May 2007 edition of Trendz we discussed the use of restraint clauses and noted that 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. A recent decision by the Employment Court reinforces the enforceability of rights under properly constructed restraint of trade clauses.

restriction on other employment or business activity

In Credit Consultants Debt Services NZ Ltd v Wilson and EC Credit Control Ltd the first respondent, Mr Wilson, was made redundant as general manager of Credit Consultants Debt Services NZ Ltd. Two months later he secured employment as a corporate sales manager with EC Credit Control Ltd, a competing firm. Credit Consultants Debt Services commenced action against Mr Wilson and EC Credit Control based on a restraint of trade clause in the individual employment agreement applying to Mr Wilson which, notwithstanding his redundancy, prevented him from working for an opposition company for a period of six months within New Zealand. The clause also covered the misuse of confidential information and soliciting existing or prospective customers. Credit Consultants Debt Services claimed that EC Credit Control had aided Mr Wilson in breaches of his individual employment agreement and sought a penalty against it.

six months okay

The Court found that the six month prohibition of employment with a competitor was reasonable because it was solely for the purpose of protecting Credit Consultants Debt Services proprietary interests which included client lists and agreements. The Court also agreed that Mr Wilson had breached the non-solicitation provision in the clause. On the evidence it was found that Mr Wilson had also secretly taken copies of confidential information before leaving Credit Consultants Debt Services.

The action against EC Credit Control succeeded based on a finding that the company had knowingly aided Mr Wilson to breach the restraints applying to him. An injunction was put in place preventing Mr Wilson working for EC Credit Control until the expiry of the six month restraint period. The Court also imposed a $6,000 penalty on Mr Wilson and a $5,000 penalty on EC Credit Control and ordered those penalties to be paid to Credit Consultants Debt Services. A further hearing will address damages against Mr Wilson and EC Credit Control.

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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.

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