Employee Restraint of Trade Voided

Thursday, June 22, 2017

Employee restraint of trade voided by non-compliance with contract by employer

Restraints of trade in employment contracts may be difficult for an employer to enforce if they have not performed their contractual obligations. This was made clear in a recent decision by the Supreme Court of Victoria (SCV) in a contractual dispute between Crowe Horwath (CHA) and its ex-employee Anthony Loone (Loone).

When Loone terminated the contract on 12 July 2016 CHA applied to the Court and obtained an interlocutory injunction which prevented Loone from providing accounting services to 89 clients with whom he had dealings with in the previous 12 months.

Loone sought to establish that the Restraint did not survive termination of the contract because CHA had repudiated the contract. A party is said to repudiate a contract by demonstrating to the other party an intention not to comply with its own contractual obligations. Repudiation by one party entitles the other party to either accept the repudiation and terminate the contract or affirm the contract and continue to perform their contractual obligations.

The problem for the employer in this case was that it had not paid bonuses to Loone that were owed to him, which was a repudiation of the contract.

In light of this case, it is unlikely that Courts will enforce a restraint of trade in circumstances where the employee has terminated the contract as a result of the employer’s repudiatory breach.

Employers should be mindful of the type of conduct that could constitute repudiation: wrongful dismissal or underpayment of remuneration for example. This case, a cautionary tale, demonstrates the consequences flowing from an employers’ repudiatory breach of an employment contract.

Employers should avoid conducting themselves in ways that demonstrates to a reasonable person in the position of their employee, an unwillingness to perform their contractual obligations as employer.

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