Insights

In brief - Restraint clause in employment contract can be enforced

A recent decision in the NSW Supreme Court has demonstrated that a properly worded non-competition restraint clause in an employment contract can be enforced even when employees offer undertakings not to solicit the employer's clients (OAMPS Gault Armstrong Pty Limited & Anor v Glover & Anor [2012] NSWSC 1175).

Insurance brokers retrenched and consigned to garden leave

Andrew Glover and Simon Gosnell are two experienced and well known marine insurance brokers who were employed by OAMPS. In March 2012 they were retrenched by OAMPS. Their employment contracts provided that they had to be given six months' notice plus a severance package. At OAMPS' election, both men were consigned to "garden leave" (ie they had to serve out their notice at home, doing no work and having no client contact).

The employees were, under their contracts, then restrained after their employment ceased, not just from contacting clients in the marine industry for up to three years, but were also required not to work in the same industry in competition with OAMPS. Significantly, the contracts said that this was to protect OAMPS' goodwill.

Neither man, however, was willing to let the grass grow under his feet. They were aged 51 years and 61 years respectively and still had young families to support and mortgages to service. Garden leave probably left them refreshed, but also eager to get a release from their restraints.

Brokers obtain employment with rival marine insurer

Some time before the expiry of the notice period in September 2012, the employees had clearly obtained new employment (in this case with FB Marine Insurance). This was obvious given that the very day after the notice period officially ended, FB issued a media release to the marine industry welcoming the employees into their fold. The next day, two prominent marine clients told OAMPS that they would switch their business to FB.

OAMPS wrote to the men and accused them of breaching their restraint covenants, not to work in a competing business. OAMPS demanded that they sign undertakings not to work for FB (although the judgment does not state the period of time that they were demanded to be restrained).

Brokers refuse to comply with non-competition demand

The men refused to comply with the non-competition demand but did offer in response not to solicit any of the clients that they had acted for whilst at OAMPS in the 12 months prior to September 2012.

OAMPS were not satisfied with this offer - it was a case of all or nothing for them. They started legal action to restrain their former employees.

Employer sees offer not to solicit clients as inadequate

The employees' offer was not without some method. The offer not to solicit clients was a substantial one and not without hope.

Legally, a restraint does not entitle an employer to anything more than what they would otherwise need to protect a legitimate interest. An offer not to solicit clients is often enough to protect an employer's interests. An employer who rejects such an offer had better have a good reason as to why it is not enough.

Here, OAMPS clearly thought that they had a good chance of getting more. The evidence of a senior officer of OAMPS was that clients of brokers bonded with them over the life of a policy. In order to maintain the goodwill that OAMPS had established, their former employees really had to be removed from the game to give OAMPS a chance to establish new relationships with their clients with new brokers in the business. If the former employees could work for a competitor who had acquired two of their clients, then others could follow and OAMPS' ability to keep the clients was compromised.

Interim injunction prevents brokers from working for competitors

OAMPS' argument was successful, at least in the short term, as the Judge granted it an interim injunction. Until final hearing, the employees could not work for FB in marine insurance broking - even though they made undertakings not to solicit OAMPS' clients. (Usually, once an interim injunction is granted, few matters proceed to final hearing. The war is usually won or lost by the injunction.)

The court thought their non-solicitation offer was not enough. Clearly the employees had to dig deeper and offer something more. The judge agreed with OAMPS that just promising not to contact clients and not dealing with any confidential information left the employees scope to do more that could have been inconsistent with their promises not to compete, which were contained in their contracts.

Employers need to be well prepared if trying to enforce non-competition clauses

Cases where employers try to enforce non-competition clauses often turn against them if the employee offers a tempting non-solicitation undertaking. Employers in such cases have to come to court armed with substantial evidence as to why such offers are not sufficient if they want to succeed with a non-competition clause.

Here, OAMPS did so and outflanked the employees as the case came on for hearing very quickly (in fact two days after the filing of OAMPS' summons in the court). It is always difficult for respondents to injunctions to be prepared immediately on the first return date of the application. The employees here had to get their case organised quickly and thoroughly but at extremely short notice.

Employers who want to enforce non-competition restraints have to get their case worked out and have a good answer as to why an offer not to solicit clients is not good enough.

Employees need to be prepared to respond immediately

Employees who make such an offer cannot just assume that that offer alone is enough. If a court case as to why a non-competition clause should be enforced is made out, then they may have little time to respond. Employees need to consider and anticipate arguments that could be raised by an employer and be ready to respond almost instantly.

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​