Restraint of trade: what if the employer breaches the contract?

Employment contracts often contain restraint of trade clauses seeking to restrict employees from engaging in certain conduct that may adversely affect the business.

Although restraint provisions may apply during and after the employment relationship, they are most frequently tested once an employee leaves, either to work for a competitor or to embark on his or her own similar enterprise.

A successful challenge to a restraint clause can leave an employer vulnerable to its competitors.

The usefulness of such clauses may be upset when one party fails to uphold its obligations under the employment agreement. Such was the case in Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163.

The facts

In November 2012, Mr Anthony Loone entered into an employment contract with a national accounting firm, Crowe Horwath Australia (”CHA”). Mr Loone was appointed Managing Principal of the Launceston office.

Over the following years, Mr Loone established strong relationships with the firm’s clients.

In January 2015, CHA was purchased by Findex Group Ltd. The purchase brought about several changes and restructuring. As a result of those changes, Mr Loone’s previous management responsibilities and autonomy were substantially reduced.

In June 2016, a new bonus incentive model was introduced, resulting in 20% of annual bonus payments being deferred for three years rather than paid annually (with the remaining 80%). Under the new direction, net profits of $440,000 were excluded from the Launceston ‘staff bonus pool’. Those net profits were attributable to Mr Loone’s efforts and involvement in acquiring another accounting firm. This consequently reduced the bonus for which Mr Loone would be eligible to receive.

Disenchanted, Mr Loone resigned in July 2016, refusing to work out any notice period on the basis that CHA had repudiated the employment contract.

CHA sought a temporary injunction in the Supreme Court, invoking the restraint of trade provisions in the employment contract. An injunction restraining Mr Loone from offering accounting services to 89 of CHA’s clients was granted in September 2016.

In April 2017, the Court discharged the injunction previously imposed, and decided that Mr Loone’s termination of the contract was valid. Consequently, the Court determined the post-employment restraint of trade clause in the contract ineffective.

CHA’s appeal of this decision was unsuccessful, the Court affirming that:

  • The change of duties introduced after CHA’s acquisition by Findex were significant, and resulted in Mr Loone’s new position no longer reflecting the role of Managing Principal as provided in his employment contract.
  • The new bonus system which introduced a deferred payment scheme breached the employment contract which, upon its proper construction, provided for annual payments.
  • By excluding the major acquisition from Mr Loone’s bonus calculations, CHA breached the employment agreement by failing to properly assess the bonus entitlement in accordance with the prescribed criteria. In particular, clause 7.5 provided that bonus payments ‘…will be determined by consideration of various performance parameters including but not limited to…personal performance…’.
  • CHA could not enforce the post-employment restraint provisions in Mr Loone’s contract because of its repudiatory conduct. Whilst the restraint provisions per se were generally enforceable, the termination of the contract by Mr Loone meant that the restraints had no legal effect. In this regard, the Court could find no other relevant precedent to refute this proposition.

A party may lawfully terminate a contract by accepting a repudiation, which is where that party demonstrates that he or she or it does not intend to be bound by the contract’s terms. CHA’s conduct was deemed repudiatory and Mr Loone’s acceptance of the repudiatory conduct entitled him to terminate the contract.

In this case, CHA paid a considerable price for its conduct. Mr Loone was awarded over $420,000 reflective of his salary for 12 months, together with $142,000 representing his full bonus entitlement for the prior year.

Key take-home points

  • Employment contracts and restraint provisions should be drafted carefully, and employers must act cautiously when introducing change that substantially alters the terms of the employment arrangement.
  • An employer’s conduct will likely be taken into consideration when relying on restraint provisions. Unilateral changes to employment arrangements at the discretion of the employer, and which breach contractual obligations, may constitute repudiation of the contract and render any restraint clause unenforceable. The exiting employee may not be restrained from taking an immediate position with a rival company.
  • Employers should review contracts regularly, and fully understand provisions regarding position descriptions, remuneration and bonus structures.

Conclusion

Employers seeking to restructure operations and introduce significant change in the workplace should seek legal advice before doing so. Certain actions may be deemed a repudiation of the employment contract, leaving the employer at risk and unable to rely on restraint provisions.

If you or someone you know wants more information or needs help or advice, please contact us.

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