Employers must think carefully before including broad restraint of trade clauses into their senior employees’ employment agreements. In the matter of Just Group Limited v Peck, at first instance ( VSC 614) and then on appeal ( VSCA 334), the courts considered several issues relating to a restraint of trade clause in an employment contract, namely:
- construction of the clause;
- meaning of several terms and phrases; and
- context of Ms Peck’s role, the length of her employment and restrictions on her further employment options.
Although courts will consider an employee’s seniority when deciding whether a restraint of trade clause is reasonable, it does not mean that all broad and lengthy restraints of trade for senior roles are permitted. This article explains the Court’s findings in this case and the lessons for employers.
Facts of the Case
Ms Peck was employed by Just Group Limited (Just Group) which has many subsidiary brands such as:
- Peter Alexander
- Just Jeans
- Jay Jays
- Jacqui E
Just Group operates in Australia as well as in Asia and the UK. Just Group employed Ms Peck for a short period between January 2016 and June 2016. She then began employment in a new role, General Manager of Group Finance and Treasury with retail and fashion brand Cotton On.
During the initial proceedings, the Court dismissed Just Group’s claims for injunctive and declaratory relief to stop Ms Peck from working at Cotton On. The Court also dismissed these claims on appeal.
What Were the Legal Issues?
When assessing whether a restraint of trade clause is too broad, it is important to review the specific wording of the restraint. The court will ask:
- Does the business have a “legitimate interest” to protect?
- Is the restraint a reasonable protection of that legitimate interest?
The restraint about Ms Peck’s employment went beyond what was required to protect Just Group’s legitimate interests for many reasons, such as:
- the lengthy term of the restraint (a maximum of 24 months); and
- the breadth of businesses the restraint covered (especially since Ms Peck had only been working at Just Group for such a short time).
Ms Peck had the senior role of CFO at Just Group, and her employment agreement included the following wording:
Restricted Activities – Personal Engagement
You must not anywhere in the Geographic Region for the Restricted Period – Personal Engagement, engage in Restricted Activities – Personal Engagement, except with the prior written consent of JGL.
The definitions referred to in the restraint clause were as follows:
Geographic Region means the geographic region of:
(a) Australia and New Zealand; or (if this is held to be invalid)
(b) Australia; or (if this is held to be invalid)
(b) Restricted Period – Personal Engagement means:
during your employment and for the period of:
(a) 24 months after the Termination Date; or (if that period is held to be invalid)
(b) 18 months after the Termination Date; or (if that period is held to be invalid)
(c) 12 months after the Termination Date.
(c) Restricted Activities (‘the Restricted Activities’) — Personal Engagement means directly or indirectly:
(a) being engaged, concerned or interested in;
(b) assisting or advising in respect of; or
(c) carrying on any activity:
1) which is the same as, or similar to, any part of the speciality brand and fashion business of a Group Company in which you were involved, or in respect of which you received Confidential Information, in the Connection Period; or
2) for or on behalf of any of the entities operating the brands listed in Annexure A, their assignees, successors or transmitters (from which, it is acknowledged, JGL and the Group have a legitimate interest in withholding their confidential information and their connections with customers, employees and suppliers).
Cotton On was one of the 50 companies listed in Annexure A.
What Did the Court Decide?
The restraint clause then restricted Ms Peck from working with any companies or undertaking any activities that were “the same as, or similar” to the business of Just Group. The list of subsidiary businesses above shows that this includes a variety of different retail and fashion brands. In both instances, the Courts agreed at first instance and on appeal that the correct interpretation of the term “same as, or similar” meant competitors of Just Group.
The Court also noted that “any activities” Ms Peck carried out as part of Just Group’s business as CFO, she would also undertake in any role in her career as a CFO or a similar position. This clause restricted her from working with any retailers or fashion brands, not just those who would be a competitor to Just Group.
The Court also decided that the wording in subclause (c)(2) meant that Ms Peck could only work with other companies to which Just Group’s confidential information would not be relevant. However, the clause also sets out that there must be a legitimate interest to withhold confidential information. The Court at first instance held that Just Group did not provide sufficient evidence as to why sensitive information needed protection from exposure to all the companies listed in Annexure A.
These two clauses worked together so that Ms Peck couldn’t work with companies unless Just Group’s confidential information was not relevant to them or they weren’t a company that was on the list of 50 businesses.
As is typical, the restraint period set out above was drafted in what is called a “cascading clause.” Under a cascading clause, the court can draw down the restraint if it considers the period to be too long. A court will not necessarily dismiss a two-year restraint automatically, but often the court will consider a period of two years far longer than is required to protect the businesses’ interest. The court held in the first instance that even the minimum 12 months was too long. The Court considered that in the circumstances where during the probation period Just Group could terminate Ms Peck’s employment with one month’s notice but then expect her not to work for 12 months after termination, was not reasonable.
On appeal, the Court held that the list of 50 businesses was not each a separate restraint. Just Group submitted that the Court could sever the section that just related to Cotton On (e.g. cross out all other names in Annexure A). The Court did not agree.
Therefore, it was not possible for the Court to sever the list just to include the relevant company. Rather, they must consider the list as a whole, and in that case, it was too broad. When including a list of competitors or describing these in any restraint clause, it’s important that the list is sufficiently specific to be enforceable and not too broad so as to stop the employee from working in their chosen profession and industry.
How Will This Affect Your Business?
Firstly, it is important to consider how to draft a restraint of trade clause. Consider the reasonableness of conditions, ensure that the wording or construction of clauses is clear, and draft any additional or cascading clauses so that they work together. For example, in this case, the drafting of the restraint clause meant that it was not possible to sever the names of competitors. The restraint term was also seen to be too lengthy. Remember that even if you use a cascading clause, it is possible that the court will decide that the minimum is still too long a period for the circumstances.
If you are an employer, you should seek legal advice before enforcing any restraints of trade in your contracts. There is significant case law on the enforcement of restraints of trade, and therefore an employment disputes lawyer can advise you on how similar restraints, in similar industries and issues, have been dealt with in the past.
As an employee, obtain advice if you are thinking of moving roles or starting your own business and have concerns about the terms of your contract. Seeking advice early can help you avoid issues later, which could mean going to court, and will prepare you if your employer seeks to enforce the restraint of trade.
If you have any questions, get in touch with our employment lawyers on 1300 544 755.