Enforcing a Covenant in Restraint of Trade

05 Sep Enforcing a Covenant in Restraint of Trade

In Austal Ships Pty Ltd v Clay [2018] WASC 178, the Supreme Court of Western Australia granted an interim injunction to restrain a former employee of Austal, Mr Clay, from commencing employment with a competitor.

Mr Clay had commenced employment at Austal in August 2014 as an assistant project manager, reporting to the production manager. In his contract of employment clause 8.2 provided:

During the Restraint Period (defined as 6 months following the termination of the employment contract), the employee must not, in the Restraint area:

1. Solicit or compete for the custom of, or accept business from, any person who was a customer of the Company at any time during the 6 months immediately preceding the termination of the Employee’s employment;
2. Solicit or endeavour to obtain the services of any professional person who was an employee, consultant or contractor of the company at any time during the 6 months immediately preceding the termination of the Employee’s employment;
3. engage in, be involved in or be associated with, or prepare to engage in, be involved in or be associated with, a business competing with the Business of the Company

Mr Clay had also entered into to a confidentiality agreement restraining him from disclosing certain confidential information for the duration of employment and for a period of two years thereafter.

In the course of his employment, Mr Clay had access to monthly reports, containing information which Austal regarded as highly commercially sensitive and confidential, including:

1. wage rates applicable to projects;
2. productivity;
3. identity of Austal’s suppliers and key contractual terms

To obtain an interim injunction which restrains the defendant until the final decision, the plaintiff must demonstrate an arguable case and that the balance of convenience favours the grant of the injunction sought.

Arguable case

Under Australian law, a covenant in restraint of trade is only enforceable if it is reasonably necessary to protect a legitimate commercial interest.

The first question to be determined therefore was whether Austal had demonstrated a serious question to be tried in that the restraint in clause 8.2 of Mr Clay’s contract could be found to be reasonable and enforceable.

Interestingly, the court found the solicitation restraint regarding customers and employees were not reasonable and could not be enforced. This was because the clauses restrained Mr Clay from dealing with employers and clients whom he had never met. Nevertheless, the court found that Austal had a legitimate interest in protecting its confidential information and that there was plausible evidence that Mr Clay had acquired confidential knowledge of the way in which Austal constructed its business pricing for tenders.

For this reason, the court was satisfied that there was an arguable case that the restraint in clause 8.2c was reasonable and enforceable.

Balance of convenience

The court was satisfied that the balance of convenience favoured an interim injunction when regard was had to the following matters:

1. 1. Clay was about to commence employment with the competition;
   2. Austal had prepared a tender response for a project;
   3. The competition had not denied that it would tender for the same project nor had they offered to employ Mr Clay in an unrelated area;
   4. To refuse the interim injunction could result in damage to Austal’s business and a significant period of the restraint period passing before there was a trial of the matter;
   5. Irrespective of Mr Clay’s honourable intentions, there was a real risk that confidential commercial information could be shared;
   6. Austal was prepared to tailor an interim injunction order to enable Mr Clay to work in a business unit which did not directly compete with Austal.

This case is a practical example of the operation of a typical covenant in restraint of trade. If carefully drafted, they are capable of protecting legitimate commercial interests in confidential information.

If you require any further information please contact Grant Hansen Email: ghansen@harrisco.com.au