Feb 012011
 

A series of cases in the NSW Supreme Court has cast more light on the willingness of courts to enforce restraints in employment contracts. In the Tulletts case, a senior executive on a fixed term 2 year contract resigned to work for a competitor. His employer asked the Supreme Court for an injunction stopping him from working for a competitor for the balance of his contract.

The contractual restraint stopped the employee for working for a competitor for 3 months after the employment ended.

The case shows that a well drafted restraint coupled with a careful and measured legal strategy can result in a positive result for employers.

Tullett Prebon (Australia) Pty Ltd (Tullett Prebon) employed Simon Purcell for a 3 year fixed term under a contract that provided:

  • neither could terminate until after two years, and then on 3 months notice;
  • Tullett Prebon could put Mr Purcell on garden leave – i.e., they did not have to give him work during the notice period ; and
  • Mr Purcell could not contact clients for 3 months after termination.

Within the 2 year initial period of the contract Mr Purcell accepted an offer from a competitor and terminated the Tulletts contract, even though termination was prohibited under the contract.

Tulletts refused to accept Mr Purcell's termination and asked the court to restrain him from working for the competitor for the balance of the fixed term, during which it would pay him.

The NSW Supreme Court refused the restraint and said the period was longer than necessary to protect Tullett Prebon's interests including its client relationships. The court said a 6 months restraint after the employment relationship ended (by the employee’s resignation) was reasonable because if Mr Purcell had terminated the contract after two years, he would have been:

  • put on three months' 'garden leave' during a notice period; and
  • restrained from working in competition with Tullett Prebon for three months after termination – this properly reflected the extent of Tullett Prebon's interest.

The Supreme Court said the restraint ran from when the employment relationship ended, which is when the gardening leave started, not when the contract ended. The “advantage” the employee got from employment in terms of confidential information and customer connections ended when gardening leave started. This logic only applies in NSW where the court applied the Restraints of Trade Act 1976.

The court said that the contractual prohibition on working for third parties was operative during the notice and gardening periods, but were still subject to the Restraints of Trade Act. Applying the ROTA, the court held that the 3 month post employment restraint was reasonable, but was only effective for 6 months after the actual employment was brought to an end by the resignation. The court would only grant an injunction restraining the employee for 6 months after the actual employment ended.

However, that was not the end of it. Shortly before the injunction expired, Tulletts directed the employee to return to work. The employee did not.

The HC case was short and sweet for the employer: The court held that the employee’s refusal to return to work was a repudiation entitling the employer to terminate for breach and to get liquidated damages under the contract. The contractual liquidated damages were just over $500,000 – a genuine pre-estimate of the employer’s loss.

The case is a salient lesson to employers and employees alike. Fixed term contracts, properly drafted, can be effective to restraint employees from competing post-employment. However, in NSW the Restraints of Trade Act will operate to limit the reach of post employment restraints to protecting the employer’s legitimate business interests.

Purcell v Tullett Prebon (Aust) Pty Ltd [2010] NSWCA 150 See related case note Employment Restraints – Court upholds 30 month restraint in Deed of Release http://www.cml.com.au/news/2009/02.html

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