The implications of an employer’s conduct on restraint of trade clauses

Restraint of trade clauses are common in employment contracts today.

Simply put, they restrain the ability of employees to compete with their employers upon termination of their employment. However, critically, the recent decision of the Victorian Court of Appeal in Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSCA 181 involved a comprehensive review of the authorities relating to the enforceability of restraint of trade clauses in circumstances where the conduct of the employer amounts to repudiation of the contract, and where that repudiation is accepted by the employee.

The employer unsuccessfully sought to have a restraint of trade clause enforced against the employee, who had terminated his employment contract by accepting the employer’s repudiatory conduct. Notably the terms of the restraint clause itself were not in issue. Instead it was the consequence of the employer’s repudiatory conduct on the subsequent enforcement of the restraint.

The employer appealed the decision of McDonald J, however it was also unsuccessful. The Court of Appeal’s analysis of an extensive list of authorities revealed an ongoing trend that an employer seeking to rely upon a restraint of trade clause must be ready and able to perform its obligations under an employment contract. Their Honours stated the following:

“What was said in those cases was capable of explanation that the defaulting party had not acquired an unconditional right to enforce the restraint clause where it was not ready and able to perform the contract in the future – being disabled from doing so by its repudiatory conduct, accepted by the employee.”

Through these proceedings, it has now been established in Australia (and supported by a long line of English and Canadian authorities) that, where an employer has repudiated a contract of employment and that repudiation has been accepted by the employee, the employer may be denied the ability to rely upon a restraint of trade clause.

Dated: 26 July 2017