However, courts can be reluctant to enforce restraints of trade, and when disputes do end up in litigation, the clauses are often carefully considered on a case-by-case basis.
At the Employers and Manufacturers Association (EMA), we constantly track and collate employment relations cases for our members, so that they can assess how case law is evolving and avoid common pitfalls that arise in employment disputes.
Common issue
Restraints of trade are one of the most common issues that come up in judgments of both the Employment Relations Authority and the Employment Court.
One of the main problems for employers is that these clauses can be deemed unenforceable if they are found to be unreasonable. So what is a reasonable restraint of trade?
A useful guide is the Employment Court judgment in the case of Fuel Espresso Limited v Hsieh, which highlighted a number of factors that can make a restraint effective.
In this case, a barista who had been trained by Fuel Espresso was restricted by a clause that prevented him from working within a 100m radius of the company’s premises, or starting a similar business within a 5km radius, for three months after the end of the employment.
After resigning, the employee violated this restriction by operating a coffee cart within 70m of the Fuel operation.
The Employment Court granted an interim injunction to prevent him from continuing his business, highlighting the reasonableness of the restraint in protecting Fuel’s business interests.
Geographical scope
The geographical scope of the restraint was not unduly broad and the length of time was also reasonable, and did not prevent the employee from pursuing a livelihood in their field.
The courts will also evaluate the restraint’s reasonableness based on the circumstances at the time the contract was signed.
For example, in the case of Walklin v Chubb NZ Ltd, the court found that a restraint of trade was unenforceable because it was not necessary at the time of signing, as the employee had no significant business knowledge or trade connections.
However, in Cookright Filtering Services Limited v Hill, an employee involved in the business of cooking oil filtering, disposal and cleaning left the company and began poaching its customers.
The Employment Relations Authority set penalties for his outright disregard for the restraint-of-trade clause in his employment agreement, but did take issue with its duration and harshness.
Enforcement
Employers seeking to enforce restraint clauses must demonstrate that the restrictions are necessary to protect their business interests and that they are reasonable in the context of the employee’s role and the public interest.
Courts may modify, sever or even refuse to enforce overly broad or unreasonable clauses.
To enforce a restraint-of-trade clause, an employer may apply for an interim injunction, which is a temporary measure pending a trial. This is often part of a broader legal action to recover damages caused by the breach of the employment agreement.
The court’s decision to grant an interim injunction is discretionary.
The employer must show that there is an arguable case for enforcement and that there are no adequate alternative remedies available. They must also show that the balance of convenience favours granting the injunction and that granting the injunction is just in the overall context of the case.
In many cases, confidentiality clauses may provide sufficient protection for proprietary information, such as trade secrets, customer lists and business strategies.
Contract law
If an employee is pressured into signing a restraint of trade, especially when there is an imbalance of power, such as financial constraints or job insecurity, the court may find the clause unenforceable.
In Force Four v Curtling, the Employment Court ruled that a restraint-of-trade clause was unenforceable due to the significant pressure placed on the employees to sign it. In particular, the judgment highlighted the unequal bargaining position between the employer and the employees, which created an imbalance in their power to negotiate fairly.
Finally, it is also important to bear in mind that, under the Contract and Commercial Law Act 2017, any contract containing an illegal provision, such as an unreasonable restraint of trade, can render the entire contract unenforceable.
So if you want to add a restraint of trade clause to your employment agreements, it certainly pays to seek legal assistance in drafting it.
