Employment lawyers are often faced with this complex legal question: do post-employment restraints survive termination if an employer breaches or repudiates a contract of employment? This issue was settled in a recent Victorian Supreme Court case that held that post-employment restraints do not survive the termination of an employment contract where an employer breaches or repudiates the contract of employment.

This means that employers (in Victoria and possibly NSW) should beware that post-employment restraint provisions, such as those designed to protect key staff from being poached by former colleagues or to prevent former employees from contacting the employer’s customers, may not be enforceable if the employer repudiates or breaches the contract of employment.

Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163

Facts

Mr Loone (the employee) was employed by Crowe Horwath (the employer) as a Managing Principal. The employment contract contained a restraint of trade clause and specified how Mr Loone was to be paid, including a clause which stated that bonus ‘forms a discretionary component’ of his remuneration. The employer deferred the payment of bonuses. Mr Loone argued that this was a repudiation of the contract by the employer.

Mr Loone left employment with Crowe Horwath. He opened his own accounting firm. Crowe Horwath sought an injunction stopping him because he breached the restraint of trade clauses in the contract that prevented him from engaging with his former employer’s competitors within a 5 kilometre radius for 12 months and from interfering with Crowe Horwath’s clients. The contract stated that the restraint of trade clauses “survive the termination of the Employment in all circumstances and for any reason.”

Despite the employer’s claim that the post-employment restraint clause was still enforceable, Mr Loone maintained that the clause was not enforceable as his employer had repudiated the contract and he relied on that repudiation when he subsequently terminated the contract.

Decision

1. Trial Judge (Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163): The trial judge held that the contract was terminated because of the employer’s repudiatory conduct and the employee’s acceptance of that repudiation and ruled in favour of the employee by deciding that the restraints could not be enforced. The trial judge also held that, even if the post-employment restraints survived Mr Loone’s acceptance of the employer’s repudiatory conduct, the injunction would be refused on discretionary grounds: [160].
2.  Court of Appeal decision (Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSCA 181): The Court of Appeal agreed with the trial judge that the employer’s repudiatory conduct breached the terms of the contract. The Court of Appeal unanimously agreed with the trial judge’s finding that no case exists in Australia in which a court had made orders enforcing a restraint covenant where an employee had terminated a contract by accepting the employer’s repudiatory conduct.

Their Honours provided a clear summary of the trial judge’s reasons for holding that the restraint clause should unenforceable at [169]:

(1) the applicant had not performed its part of the bargain and was not ready and able to do so in the future; or

(2) it would be contrary to public policy to treat sch 2 cl 1.2(e) as operating subsequent to the respondent’s acceptance of the applicant’s repudiatory conduct. The applicant’s argument meant that this clause, and hence the restraint clause, would have continuing operation despite the gravest breach of contract by it; or

(3) continued operation of sch 2 cls 1.2(e) and 3.1 would be inconsistent with the applicant not having given substantive consideration for the restraint clause; or

(4) as a matter of construction, the clause was not to have operation in the event of the applicant’s repudiation of the contract, accepted by the respondent; and

(5) regardless which was the correct analysis, no case in Australia had held a restraint covenant to be operative against an employee who had accepted an employer’s repudiatory conduct; and also

(6) high authority, binding upon him, dictated that sch 2 cls 1.2(e) and 3.1 be held inoperative against the respondent.

The Court of Appeal acknowledged that the restraint of trade clause was designed to protect the employer’s interests and intended to operate after the contract terminated [193(1)]. However, Their Honours noted that over the past 100 years, a series of High Court decisions and courts of high authority in England and Canada have stated that a restraint clause is not enforceable against an employee whose employment ends by the employer’s wrongful conduct – be it wrongful dismissal or the employee’s acceptance of the employer’s repudiatory conduct [193(3)]. Both the trial judge and Court of Appeal found no reported case of superior jurisdiction in Australia or England which decided that a restraint clause is enforceable against a former employee in such circumstances: [193(4)].

Despite the express language used in the contract under the restraint of trade clause that the clause would “survive the termination of the Employment in all circumstances and for any reason”- the Court of Appeal held that such language will not save the restraint clause where an employer’s repudiatory conduct is accepted by an employee: [193(12)].

Period of notice

Mere delay in the employee’s acceptance of the employer’s repudiation of a contract of employment does not amount to affirmation where the employee makes their objection to the repudiatory conduct clear.

In Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163 at [63], a delay of 11 days between the employer’s repudiatory conduct and the employee’s acceptance of that conduct did not stop the employee from bringing the contract of employment to an end by the acceptance of that conduct. Similarly, in Hine v Macquarie Bank Limited [2019] VSC 287 at [13] (which cited the Crowe Horwath case), the Court expressed a preliminary view (on an interlocutory matter only) that the employee giving 4 weeks’ notice per the contract did not preclude the employee from terminating  the contract by acceptance of the employer’s repudiatory conduct.

Important takeaway points

If an employer repudiates a contract of employment and the employee accepts that repudiatory conduct, then the employer is prevented from relying on post-employment restraint clauses against the employee in the event of termination.

Contact Peter McNamara today if you are concerned about the enforceability of post-employment restraint clauses.

To read the full decision of Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163, click here.