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Brooks, Adrian --- "The Limits of Competition: Restraint of Trade in the Context of Employment Contracts" [2001] UNSWLawJl 27; (2001) 24(2) UNSW Law Journal 346

[*] Professor, Faculty of Law, University of New South Wales.

[1] The other being, put simply, sale of a business enterprise.

[2] See Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch 169. See also below, Part III.

[3] So well established is this commitment that where an employer seeks an interlocutory injunction against a former employee on the basis of an implied duty not to compete, the injunction will be refused on the grounds there is no serious issue to be tried: see Wallace Bogan & Co v Cove [1997] IRLR 453.

[4] It is usually not accurate to speak of ‘restrictive covenants’ since today few if any employment contracts are by deed. However, the phrase ‘restrictive covenants’ has become almost universally used for contractual restraints on future employment and an insistence on the accurate phrase ‘restrictive clauses’ would interrupt the text of this article by its variation from the norm.

[5] Thus for a restraint to protect goodwill, it is essential that the conduct so restrained amounts to competition. An ex-employee cannot be restricted from being involved with businesses of the same type that are not in competition with the former employer: see Scully UK Ltd v Lee [1998] IRLR 260.

[6] The limiting effect of this requirement is diminishing with the globalisation of the economy. See Scully UK Ltd v Lee [1998] IRLR 260, 263 (Aldous LJ):

The fact that the clause is not limited to the United Kingdom does not, in my view, make it unreasonable. Business is becoming increasingly international and the covenant is to protect dissemination of confidential information. That is not constrained by national boundaries.

Nor, in appropriate cases, are customers constrained by national boundaries, with the result that a covenant protecting goodwill could also be enforceable despite a very wide geographical coverage.

[7] The addition of words must be distinguished from the interpretation of words, which in the context of the other terms of the contract bear a narrower and more specific meaning than in ordinary parlance. This was the justification Lord Denning gave for upholding the covenant in Littlewoods v Harris [1978] 1 All ER 1026, 1035-7. However, it is difficult to disagree with Browne LJ in dissent that the alleged interpretation was not required by the context, and that it amounted to an adding of words ‘[which] is something ... this court cannot do’: Littlewoods v Harris [1978] 1 All ER 1026, 1046 (Browne LJ).

Note that in New South Wales, the Restraint of Trade Act 1976 (NSW) s 4 (3) allows a reading down to a reasonable covenant by recasting the phraseology of the interest, time and geographical limitations, providing that the unreasonable nature of the restraint does not indicate a failure to attempt to frame the restraint reasonably.

[8] [1988] IRLR 392.

[9] Ibid 393.

[10] Ibid 396.

[11] Ibid.

[12] [1964] 3 All ER 731.

[13] Two cases – Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 and Kone Elevators Pty Ltd v McNay (1997) ATPR 43 830 – dealt with clauses prohibiting post-employment use or disclosure of confidential information. In each case, the court examined whether the taking of a particular job by the former employee would involve use of such information.

[14] (1994) 55 IR 357.

[15] Ibid 358.

[16] [1990] IRLR 473.

[17] Ibid 475.

[18] This refers to striking out offending words, presumably with a blue pencil which would stand out against the black ink of legal documents. See above text.

[19] Briggs v Oates [1990] IRLR 473, 475.

[20] Ibid.

[21] Ibid.

[22] See, eg, Kaufman v McGillicuddy [1914] HCA 63; (1914) 19 CLR 1.

[23] Ibid. See also General Billposting Co Ltd v Atkinson [1908] UKLawRpAC 87; [1909] AC 118 (‘General Billposting’); Measures Bros Ltd v Measures [1910] UKLawRpCh 68; [1910] 2 Ch 248.

[24] Briggs v Oates [1990] IRLR 473, 478.

[25] [1994] IRLR 69.

[26] Mason v Provident Clothing Co [1913] UKLawRpAC 37; [1913] AC 724.

[27] [1996] IRLR 188.

[28] Ibid 189.

[29] Ibid 192.

[30] [1996] IRLR 193.

[31] Ibid 195.

[32] Ibid.

[33] Ibid 197.

[34] Ibid 197-8.

[35] [1996] EWCA Civ 694; [1996] IRLR 675.

[36] [1908] UKLawRpAC 87; [1909] AC 118; Measures Bros Ltd v Measures [1910] UKLawRpCh 68; [1910] 2 Ch 248.

[37] Rock Refrigeration Ltd v Jones and Seward Refrigeration Ltd [1996] EWCA Civ 694; [1996] IRLR 675, 678. General Billposting Ltd v Atkinson [1908] UKLawRpAC 87; [1909] AC 118 is authority for the principle that a rescission for repudiatory breach frees the innocent party from all contractual obligations binding on them; but obligations for the benefit of the innocent party continue in force. See also above text and n 20.

[38] Spencer v Marchington [1988] IRLR 392, 396.

[39] [1991] IRLR 214.

[40] Ibid 216.

[41] Ibid 219.

[42] Ibid 218.

[43] Ibid 221.

[44] Ibid.

[45] See above n 7.

[46] [1988] IRLR 483.

[47] Ibid 484.

[48] Ibid 485.

[49] [1973] IRLR 28.

[50] Ibid.

[51] Rex Steward [1988] IRLR 483, 485.

[52] Ibid.

[53] [1997] IRLR 636.

[54] [2000] EWHC 566; [2000] IRLR 227.

[55] Ibid 232.

[56] [1998] IRLR 259.

[57] Ibid 264.

[58] [1993] 51 IR 118.

[59] Ibid 120. This ‘confining of the operation of the injunction’ is possible by the reading down of unreasonably wide clauses authorised by the Restraint of Trade Act 1976 (NSW); see above n 7.

[60] [1997] EWCA Civ 1753; [1997] IRLR 442.

[61] Ibid 446.

[62] [1993] EWCA Civ 2; [1994] IRLR 82.

[63] [1959] Ch 108.

[64] Ibid 84.

[65] [1996] IRLR 25.

[66] (Unreported, Court of Appeal (Civil Division), Russell and Leggatt LJJ, 12 November 1993).

[67] Quoted in Alliance Paper [1996] IRLR 25, 287.

[68] Alliance Paper [1996] IRLR 25, 28.

[69] Dawnay Day [1997] EWCA Civ 1753; [1997] IRLR 442, 448.

[70] [1999] IRLR 22.

[71] Ibid 23.

[72] Care needs to be taken with the headnote of this case, which claims that there was ‘no material difference between the covenant in the present case and those held to be unenforceable’ in Hanover Insurance and Dawnay Day. The agreement in Dawnay Day was both a joint venture agreement and a service agreement. There were two clauses dealing with non-recruitment: one purported to apply to all employees, the other to ‘senior employees’. It was the latter that Evans LJ discussed and upheld. The former had been rejected at first instance as unreasonably broad, and was not in issue in the Court of Appeal.

[73] [2000] IRLR 233.

[74] Ibid 238.

[75] [1959] Ch 108.

[76] In Alliance Paper and TSC Europe, the sales were ‘normal’ sales of a business. In Dawnay Day, the business (through the defendants) entered into a joint venture with the investment bank Dawnay Day and Co Ltd, as a result of which the joint venturers set up the business of Dawnay Day Securities Ltd, with the defendants as managers of DDS.

[77] Alliance Paper [1996] IRLR 25, 27.

[78] Dawnay Day [1997] EWCA Civ 1753; [1997] IRLR 442, 446.

[79] TSC Europe [1999] IRLR 22, 26.

[80] [1946] Ch 169.

[81] However, there could be rare situations where the spare-time work creates threats to attributes of the employee for which the employer had engaged them; eg, a tenor engaged for a season at the Metropolitan Opera may work in his spare time in the freezing room of an abattoir, thereby creating a risk of colds and consequent harm to his voice!

[82] One such criterion, relevant to employment, was that equity eschews orders that would require continuous supervision. This was seen as making employment contracts (and building contracts) an inappropriate field for equitable remedies.

[83] [1852] EngR 602; (1852) 1 De G M & G 604.

[84] [1937] 1 KB 209.

[85] [1965] NSWR 988.

[86] (1993) 30 NSWLR 337.

[87] Many of the cases concerning exclusive service clauses concern persons who would have been independent contractors rather than employees. The doctrines were developed without reference to this distinction, though it may help to explain later developments.

[88] Curro (1993) 30 NSWLR 337, 340.

[89] Ibid 346.

[90] Ibid 346.

[91] Ibid.

[92] [1972] Ch 305.

[93] (1984) 155 CLR 635.

[94] (1988) 80 ALR 455.

[95] Curro (1993) 30 NSWLR 337, 347.

[96] Ibid.

[97] Ibid.

[98] (1995) 62 IR 43.

[99] See below text.

[100] Mann v Capital Territory Health Commission [1981] FCA 160; (1981) 54 FLR 23.

[101] Curro (1993) 30 NSWLR 337, 347.

[102] This is not an argument that persons employed outside the area of performance should be compelled to observe exclusive service clauses by injunction rather than merely be encouraged to do so by the spectre of damages. It is an argument that all employees should be treated alike, preferably by such clauses being unenforceable, leaving employers to the protection of the duty of faithful service. If not, the remedy for breach should be in damages only.

[103] [1989] IRLR 84.

[104] However, the clause is another example of bad drafting. As it stands, it does not prohibit concurrent employment with another employer in the same field ¾ which, one would have imagined, would be the main thing that the initial employer would want to prevent! The Court of Appeal dealt with the clause on the basis that it prohibited concurrent limited-area employment.

[105] Provident Financial [1989] IRLR 84, 86.

[106] [1937] 1 KB 209, 216.

[107] [1989] IRLR 84, 87.

[108] Ibid 88.

[109] [1993] IRLR 172.

[110] Ibid 174.

[111] Cited by Simon Brown LJ: ibid 174.

[112] [1994] IRLR 119.

[113] Ibid 120.

[114] Ibid.

[115] Ibid 123.

[116] Hivac [1946] Ch 169, 174.

[117] [1995] IRLR 206.

[118] Ibid 207.

[119] Ibid.

[120] Ibid 209.

[121] Provident Financial [1989] IRLR 84, 88.

[122] Namely, Warner Bros Pictures Inc v Nelson [1937] 1 KB 209 and Lumley v Wagner [1852] EngR 602; (1852) 1 De G M & G 604.

[123] See, eg, the statement of principle in Curro (1993) NSWLR 337, 343.

[124] The possibility that the duty extended further than the previously limited field was in fact raised in Provident Financial [1989] IRLR 84, 87. It has subsequently been further developed in William Hill Organisation Ltd v Tucker [1998] EWCA Civ 615; [1999] ICR 291.

[125] [1996] IRLR 450.

[126] Ibid 455.

[127] [1998] IRLR 504.

[128] [1998] EWCA Civ 615; [1999] ICR 291.

[129] [1997] UKHL 23; [1997] ICR 606, 621.

[130] William Hill [1998] EWCA Civ 615; [1999] ICR 291, 297.

[131] Ibid 301.

[132] Ibid.

[133] It must be acknowledged that the impetus for development comes from the British courts. Australian courts have not broken new ground in this area, but with both countries subject to the same evolutionary forces within their economies, there is little doubt that the British developments will be taken up here.

[134] This is a matter on which Australian courts have been noticeably more ‘traditional’ than their British counterparts. However, despite the apparently categorical adherence to the traditional approach in Curro (1993) 30 NSWLR 337, it is my belief that the tide will turn in this country also.