Preston Russell Law - Legal Services for Southern People

Reasonableness and Restraint of Trade

Saturday, May 07, 2011 by Mary-Jane Thomas, partner category Work to Rule

It has often been said that restraint of trade clauses are “not worth the paper they are written on”. However, in a recent case the Employment Court has stipulated that “such days are now behind us”.

Transpacific Industries Group (NZ) Limited (“Transpacific”), sought to enforce a “covenant not to compete”, against a former employee Mr G. Mr G had recently started work for a competitor of Transpacific. This was in spite of the fact that Mr G’s contract with TIG stated that:
 
“We [Transpacific] may suffer serious injury if you [Mr G] took the knowledge and skills acquired during your employment with us and applied them for the benefit of a competitor of ours. Accordingly, you agree that you shall not work for a competitor either directly or indirectly for that period of time[…], and in that area set out in Schedule C [the time period being three months and the area being the whole of the North Island of New Zealand]”. 

A further clause in the contract stipulated that:

“For the periods and areas set out in Schedule C [again the period being three months and the area being the whole of the North Island of New Zealand] following termination of employment you shall not […]
               Solicit, divert, appropriate to or accept on behalf of any competing business;
               or
               Attempt to solicit, divert, appropriate to or accept on behalf of any competing
               business;
any business from a customer or actively sought prospective customer of the Employer with whom you have dealt, whose dealings with us you have supervised or about whom you have acquired confidential information in the course of employment”.
 
Transpacific applied to the Employment Relations Authority (“ERA”) seeking to enforce the covenant. Transpacific were successful before the ERA and Mr G filed an appeal in the Employment Court. One of the grounds on which Mr G sought to have the ERA’s decision overruled was that a restraint such as this was unreasonable.
 
Mr G put forward the idea that although the three-month period was not unreasonable, the location, being the whole of the North Island of New Zealand, was. Although the Employment Court disagreed with Mr G in regard to the reasonableness of location, it stated that skills and knowledge are not the property of the employee. The court also added that although restraints may be lawful to the extent that they reasonably protect a proprietary interest that the employee has, the law does not extend to prohibiting competition alone. Any such clause is arguably void as it contravenes public policies of competition in commerce and freedom of work.
 
Following on from its reasoning the Employment Court decided to enforce the covenant but only in regards to the second part of restraint mentioned above. This being in relation to any customers or potential customers which Mr G had contact with during his former employment with Transpacific.
 
So what does such a ruling mean for the employer? Although the Court said “gone are the days where restraint of trade clauses are not worth the paper they are written on”, such restraints will only be enforced to the extent that they do not contravene public policies of competition in commerce and freedom to work. Therefore any restraint of trade clause in a contract must be reasonable. Not only must they be reasonable in terms of time period and location, they must also be reasonable in that they only protect a proprietary interest of the employer and not the skills and knowledge of the employee.