Ruth Collins, MDC Legal
In the recent decision of Devil Dog Pty Ltd v Cook  WASC 27, the Supreme Court of Western Australia granted an interim injunction to prevent a former employee from competing with his former employer’s business. The decision is a timely reminder on the importance of carefully drafting and considering restraint of trade clauses in commercial agreements.
The defendant, Mr Cook, was the owner of “Matchtec Hydraulics”, a business that manufactured, serviced, and repaired hydraulic cylinders. In 2014 Mr Cook sold the business to the plaintiff, Devil Dog Pty Ltd (Devil Dog), for $650,000, $588,700 of which was attributed to the goodwill of the business.
As part of the purchase agreement between the parties, Mr Cook agreed to continue working for the business for a year. Mr Cook also signed a Deed of Restraint that prevented him from engaging in any business that was similar to Matchtec Hydraulics, accepting any business from Matchtec Hydraulics’ clients, or interfering with Devil Dog’s relationship with Matchtec Hydraulics‘ clients for a period of 10 years within Western Australia. Mr Cook did not pay attention to the terms of the Deed of Release and did not receive legal advice about the Deed because he was planning to return to the United Kingdom at the end of 2016.
Mr Cook worked for Devil Dog until 30 June 2016. In July 2016 Mr Cook began working in a competing hydraulic engineering business. Devil Dog applied for an injunction against Mr Cook preventing him from engaging in any hydraulic engineering business, soliciting or accepting business from any of Matchtec Hydraulics’ clients, or interfering with the relationship between Devil Dog Pty Ltd and Matchtec Hydraulics’ clients.
Justice Tottle found that Devil Dog had established a prima facie case that the clauses in the Deed of Restraint were reasonable. The Court accepted the plaintiff’s evidence that Matchtec Hydraulics’ clients were located in regional WA as well as the Perth metropolitan area and reached the conclusion that Devil Dog had a prima facie case that Western Australia was a reasonable area to restrain Mr Cook.
The Court also accepted, on an interlocutory basis, that Devil Dog had a prima facie case that 10 years was a reasonable period of time to restrain Mr Cook, for 3 reasons. Firstly, the Court noted that 90% of the purchase price was attributed to Matchtec Hydraulics‘ goodwill, which suggested that the business had the benefit of repeat business from its customers and enjoyed some degree of customer loyalty. Secondly, the Court concluded that Mr Cook had a strong personal connection with Matchtec Hydraulics‘ customers. Thirdly, the Court noted that the parties, bargaining at arms’ length, had negotiated and agreed upon a 10-year restraint period. This was after all in the context of a commercial sale of business, for which courts will more readily uphold restraints than in mere employment contracts.
Despite finding in Devil Dog’s favour for the interim injunction, the Court expressed significant reservations about the reasonableness of the 10 year restraint and noted that this appeared to be “at the outer edge of what may be considered to be reasonable.” It remains to be seen whether this period will ultimately be held to be reasonable and therefore enforceable if the matter goes to a final judgment.
There are two important lessons from this decision:
- For businesses seeking to protect their commercial interests through restraint of trade clauses in commercial agreements, for example, in purchase agreements or employment contracts, it is important that these clauses are carefully drafted to ensure that they are enforceable. Just because the other party agrees to the clause at the time of the agreement will not mean that the clauses are enforceable.
- For businesses or individuals subject to a restraint of trade clause, for example, as a vendor selling a business or as an employee, it is very important that you consider and take advice on these clauses before signing any agreement. These clauses can seriously limit your ability to be employed or do business in your industry and breaching these clauses can result in you having to defend expensive legal proceedings.
MDC Legal has significant experience in advising on and acting in restraint of trade matters. If you have a query regarding a restraint of trade clause in a commercial agreement or employment contract, contact our team today.