Restraint of trade hard to enforce


Two recent Hawke's Bay restraint-of-trade cases heard by the Employment Relations Authority highlight the difficulties of restraint clauses in employment contracts.

In an interim determination, sought between Farmer's Transport Ltd and Robin Joseph Hislop, the Authority heard that in April Mr Hislop ceased his employment as a branch manager with Farmer's Transport Ltd (FTL) in Waipawa, subsequently accepting a position as livestock manager with Central Transport Ltd (CTL) based in Reporoa.

In his employment contract were confidentiality and restraint of trade clauses.

He was not to work within 150 kilometres of Waipawa. He was compensated $1000 by FTL for the 12-month restraint.

Even though Mr Hislop was based in Reporoa, CTL regularly sent stock to Hawke's Bay and sought backloads. It had two-way loading arrangements with three meat companies.

FTL sought an interim decision from the Authority enforcing the provisions in Mr Hislop's employment contract, so that he could no longer work for CTL.

The Authority found there was "a seriously arguable case" relating to the enforcability of the restraint, an interpretation issue relating to whether the 150km limit related to CTL's head office or its field of operation and said: "There are a number of credibility matters between Messrs Jason Roebuck, Brian Kelsey and Robin Hislop and a number of other witnesses involved in the matter".

The Authority said Mr Hislop should not have to stop working for CTL in Reporoa but should comply with the restraint/non solicitation and confidentiality clauses in the first variation of employment contract "until such time the parties can reach agreement on any variation and or the Authority orders otherwise upon hearing from both parties".

The parties subsequently reached agreement, with Mr Hislop keeping his CTL job, before the case proper was heard.

In the second recent Hawke's Bay restraint-of trade-case before the Authority, Craig McKinnon sought for the Authority to free him from restrictive employment contract covenants.

Mr McKinnon worked as merchandise sales representative based at Elders' Hastings branch office, although this work comprised largely of travelling to farming properties in the Hawkes Bay region.

The employment agreement between Mr McKinnon and Elders had a restraint of trade provision within a 250km area and a two-year non-dealing clause.

In April, Mr McKinnon advised his manager that he had accepted employment with competing firm Farmlands Trading Society Ltd.

Elders wrote to Mr McKinnon to remind him of his obligations, including the restraint of trade and confidentiality requirements. It said it was prepared to reduce the duration of the non-competition provision to two months in exchange for signed undertakings that Mr McKinnon abide by the remaining contractual provisions.

Mr McKinnon made an alternative offer. He proposed to start work with Farmlands at their Waipukurau branch office, about 50km away from Elders' office in Hastings and advised that for two months he would not perform work in the Napier/Hastings area and comply with the non-solicitation provisions of his agreement.

Elders did not accept Mr McKinnon's counter-offer and said it was prepared to pay Mr McKinnon an additional month's salary for each month that the non-competition clause applied.

Mediation was unsuccessful and Mr McKinnon started work with Farmlands in May at its Paeroa branch, outside the prohibited area.

The Authority found that the non-competition clause of the employment agreement was reasonable and enforceable only for the period of three months from the termination of Mr McKinnon's employment and only for a geographical distance of 85km from Elders' office on Stoneycroft Street, Hastings

The two-year non-dealing clause of the employment agreement was found to be unreasonable and unenforceable due to the nationwide nature of Elders.

"The provisions of the non-solicitation clause are so broad that compliance would be difficult and inadvertent breach more than a mere possibility.

"I agree with Mr McKinnon's submission that he cannot be expected to know the names of every client of Elders and he cannot know who he can and can't approach to solicit work," Authority member Michele Ryan said.

Napier employment law specialist Gary Tayler said restraints of trade clauses have always been considered unenforceable unless they can satisfy the Authority or the Court that they should be enforced.

"The tests applied are: Is the clause reasonable and lawful? If so should the clause be enforced in the public interest?

"The reasonableness test is measured at the time the agreement is entered into and, providing the bargaining provisions in the Employment Relations Act have been complied with, the test is not a difficult one for the employer to satisfy. The Court of Appeal's view is that agreements are made to be kept.

"The question of whether the clause should be enforced however, depends on a number of issues: The geographical area of the restraint, the time period of the restraint and whether there are bridesmaid clauses such as non solicitation clauses and confidentially clauses that are enforceable in their own right.

"Proven breaches of these clauses usually result in the restraint clause being enforced both with and without modification in order to protect the employer's business from an unfair advantage.

"When deciding whether to enforce a clause, the authority has the power to modify the restraint by reducing the coverage area and/or reducing the time period before enforcing it."

- Hawkes Bay Today

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