Introduction

The aim of this essay is to advise Lucy on whether or not the restraint of trade clause
against her is valid and enforceable. It will begin by identifying the legal issues, and then
will discuss the law with regards the legal issues. Lastly, it will apply the law to the facts.
The legal issues arising from the given facts are as whether or not is express terms of a
contract of employment are enforceable? And Whether or not a restraint of trade clause
in Lucys contract of employment is reasonable enough to be enforced by the Courts of
Law?
Restrictive Covenant / Restraint of Trade Covenant
A restrictive covenant or restraint of trade covenant is any contractual term that seeks to
restrict the freedom of a party to engage in an activity. It includes any provision forming
part of a contract. 1 A post-employment restraint is a contractual term that comes into
effect after a persons employment ends. Each term gives rise to a contractual
obligation and breach of which can give rise to litigation. Hence, Lucy is bound by the
terms of the contract. Usually, post-employment restraint will seek to prevent an exemployee from using contacts gained during their employment to compete against their
former employer.2 In fact, a restraint of trade is a common law doctrine relating to the
enforceability of contractual restrictions on freedom to conduct business. In an old
leading case of Mitchel v Reynolds3 Lord Smith LC said,
It is the privilege of a trader in a free country, in all matters not contrary to law, to
regulate his own mode of carrying it on according to his own discretion and
choice. If the law has regulated or restrained his mode of doing this, the law must
be obeyed. But no power short of the general law ought to restrain his free
discretion.
There are two distinctly different forms of contracts in restraint of trade namely: In the
employment contract sphere and in the competition law sphere. 4 The latter deals with
instances typically associated with the sale of a business where the buyer and the seller
1

Smith and Thomas: A Casebook on Contract (11th edn. London: Sweet and Maxwell 2000)
Alan F. Cain, Montanas Law Regarding Contracts in Restraint of Trade (30 Mont. L Rev 1968)
3
(1711) 1 P Wms 181
4
Smith and Thomas: A Casebook on Contract (11th edn.)
2

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enter a voluntary contractual arrangement, typically restraining the seller from operating
a defined commercial activity within a confined geographical area, for a fixed period of
time whereas the former, being restraint of trade in the context of formal employment. 5
Employers are often concerned with protecting their business interests when an
employee leaves to work for a competitor. The law will protect the employer if necessary
by implication of a term of fidelity in the contract of employment thereby restraining the
employee inter alia from divulging confidential information. 6 However the employer may
wish to go further and extract an express promise in the form of a restrictive covenant. 7
Restrictive covenants are vital to protect the interests of the employer as there are no
implied terms that provide protection from competition, solicitation and sharing of trade
secrets or confidential information after the contract of employment is terminated. 8 It is
therefore, now common for employers to insert restraint of trade covenants into
employment contracts for senior as well as junior employees, which seek to restrict an
employees conduct post-employment.9
There are four main types of restrictive covenants, which are: non-solicitation, nondealing,

non-competition

and

non-poaching.

The

employer

must

prove

the

reasonableness of each covenant, in the form of protecting a legitimate interest which is

potentially placed in jeopardy by the ex-employee, or else it shall be rendered void. 10
Restrictive covenants can be used by employers to protect three basic areas:- Business
connections such as customer (past or present), prospective customers, suppliers and
other key contacts; trade secrets and confidential information; and stability of the
workforce.11
Clearly, restraint of trade clauses are usually placed in employment contracts to make
contractual restrictions on freedom to work for competitors. In the Bulldogs Rugby
5

Treitel G H, The Law of Contract (11th edn London: Sweet & Maxwell 2003)
Smith and Thomas: A Casebook on Contract (11th edn)
7
Smith and Thomas: A Casebook on Contract (11th edn)
8
Treitel G H, The Law of Contract (11th edn)
9
Treitel G H, The Law of Contract (11th edn)
10
Wilberforce, Richard, Alan Campbell and Neil Elles, The Law of Restrictive Practices and Monopolies (2nd edn
Sweet and Maxwell London, 1966)
11
Wilberforce, Richard, Alan Campbell and Neil Elles, The Law of Restrictive Practices and Monopolies (2nd edn
Sweet and Maxwell London, 1966)
6

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League Club Pty Ltd v Williams 12 case a validity of restraint of trade clause was
challenged and a question was raised as to whether or not it was enforceable. The facts
were that; the defendant, Sony Bill Williams, a rising star rugby player, signed a five
year contract with the first plaintiff, Bulldogs Rugby League Club, on 16 May 2007. The
contract involved him playing for Bulldogs for 2007-2012 seasons. When Williams
signed a contract he agreed not to participate in any football match of any code without
the prior written consent of the club which was written under clause 3.1(t) of the
contract. However Williams signed another contract with Rugby Club Toulonnais SA,
without informing Bulldogs, in July 2007 to play rugby in France then left Australia on 26
July 2008. When Bulldogs found out about this they sought urgent injunctive relief
against Williams to enforce clause 3.1(t), however Bulldogs kept paying Williams
regardless of his absence. In this case the legal issues that arose were as follows: 13

Whether or not the employment contract remained on foot?

Whether or not the restraint of trade on Williams was valid and reasonable?

The court was of the view that the clause can be valid only if it is not against public
policy and is placed to protect the legitimate interests of an employer which may be the
subject of protection by covenants, furthermore, the clause must be in the nature of
proprietary interests. The court also determined whether the clause is reasonable. The
court was of the view that only in very unusual circumstances would a restraint that
operates during the employment be found to be unreasonable. 14 The court further
reaffirmed a known common law general rule if the contract is a contract for the
provision of special services, the promise not to work for a competitor will be enforced.
If that is the case the judge has a power to compel her to abstain from the commission
of an act which she has bound herself not to do and thus possibly cause her to fulfil
her/his engagement.15
Determining whether the contract remains on foot is very important as the terms can be
only enforced, if valid, if the contract remains on foot. Williams did not tell his team that
he was leaving hence there was no repudiation given and there was no evidence of
12

[2008] NSWSC 822

Bulldogs Rugby League Club Ltd & anor v Williams & ors [2008] NSWSC 822
14
Bulldogs Rugby League Club Ltd & anor v Williams & ors [2008] NSWSC 822
15
Bulldogs Rugby League Club Ltd & anor v Williams & ors [2008] NSWSC 822
13

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Bulldogs agreeing to terminate the contract because Bulldogs still performed their duty
as if the contract remained on foot. This can be seen in the Bulldogs decision to keep
paying monthly instalments up to July 2008 and them saying had Williams approached
them rather than leave without noticeprobably have released him. Since no signs of
termination were seen the court held that the employment contract at the time between
Bulldogs and Williams remained on foot. This implied that the restraint of trade can be
enforced if it was valid.16
The court held that Bulldogs had legitimate protectable interests and the restraint of
trade clause did not extend further than reasonably necessary to protect them. This
meant that the restraint was enforceable. There were a few reasons why their interests
were protectable. Williams playing for Toulon increases the chance of him being injured,
preventing him from fulfilling his obligation to play for Bulldogs which defeats the main
purpose of the contract. Bulldogs also would be suffering from decreased in revenue
from losing a star player, for an example Williams fan will no longer come to the game
hence the decreased in ticket sales. The judge also agreed the claim made by Bulldogs
that they would have irreparable harm, if injunctive relief was not given, since they will
lose competitiveness in NRL as their recruitment strategy heavily relied on the presence
of Williams and no players can substitute his skills. All these reasons and irreparable
harm that could arise were a justification of the clause, hence it was enforceable.
Hence, a negative covenant was enforced.
Another significant point is that the court accepted the general rule principle made from
Lumley v Wagner.17 The court saw footballers as entertainersproviding special
services under their contracts. The judge could not force Williams to play for Bulldogs
but could stop him from playing for Toulon to induce him to play for Bulldogs like an
injunctive relief, as given in the Lumley v Wagner case.
Additionally, in Patel v Patel18 The defendant was employed by the plaintiff under a
written contract which included the following clause - "upon the determination of the
employee's employment whether by effluxion of time or pursuant to clause 7, 8, or 11,
16
17
18

Bulldogs Rugby League Club Ltd & anor v Williams & ors [2008] NSWSC 822
(1852) 1 De GM and G 604
(1985) Z.R. 220 (S.C

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hereto the employee shall not for a period of two years ensuing take up employment
within Zambia and has to immediately leave the country". The defendant was employed
as an engineer and after leaving the plaintiff obtained employment with Lusaka City
Council. The plaintiff claimed, inter alia, damages for breach of the clause and gave
evidence that one of the reasons for the restriction was that the plaintiff did not wish
other people to take advantage of the fact that he had paid the defendant's air fare. It
was held that: The plaintiff's trades secret and trades connection were in no way
threatened by the defendant's taking employment in the public sector. To read the
binding out clause as preventing the defendant talking such employment would make it
far too wide and therefore unreasonable and unenforceable. It was further held that, the
reason for imposing the restriction that is that the plaintiff did not wish other people to
take advantage of the fact that he had paid the defendant's air fare could never be held
to be reasonable. Lastly, a binding out clause debarring servant who is an engineer
from taking employment in the whole of Zambia is too wide to be considered
reasonable;
With regards the case at hand, Lucy resigned from her contract of employment,
however, the facts do not tell us whether her contract was a fixed term employment
contract. The second thing is that Lucys contract is not a contract for the special
services, the promise not to work for a competitor is not likely to be enforced.
Furthermore, in Lucys case the restraint of trade clause incorporates a timeframe in
which Lucy cannot work for any of Nissan Vehicle Limiteds rivals. It states for a period
of 3 years following the termination of their employment. In the case of Stenhouse
Australia Ltd v Phillips,19 Wilberforce LJ stated,
It is for the judge, after informing himself as fully as he can of the facts and
circumstances relating to the employer's business, the nature of the employer's
interest to be protected, and the likely effect on this of solicitation, to decide
whether the contractual period is reasonable or not

19

[1933] 1 Ch 935

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If the covenant seeks to restrain an employee for an amount of time longer than
necessary, the judge can hold it to be excessive, unreasonable and void. In Lucys case
the clause is unreasonable and void because three years is longer than necessary.
Furthermore, the clause in Lucys contract is also a non-competition restraint clause
because it prevents Lucy from working in the industry or working for any competitors.
There are several limitations on the right of the employer to impose such restraints, for
the courts will look with a critical eye on any agreement which has the effect of
restraining a person from earning his livelihood in the future. 20 The employer cannot
take away the employees skill, experience and repertoire of knowledge which they have
obtained during the employment, and in particular, the employer cannot protect
themselves against competition per se. The case of SW Strange Ltd v Mann21 affirms
this. Once the court has looked at the legitimate interest of the clause, they must also
look to see of the reasonableness, and in terms of non-competition covenants the time
and area covered. Lord Parker quoted: no more than adequate protection to the party
in whose favour it is imposed. Lord Parker also stated in the case of Herbert Morris
Limited v Saxelby;22 I cannot find any case in which a covenant against competition
by a servant or apprentice has, as such, ever been upheld by the Court.
Hence, Lucy could argue that the timeframe of three years and the area 30 kilometers
of Lusaka town is too wide and unreasonable. Smith and Thomas 23 proffer that:
A contract may be complete and perfect so far as offer, acceptance and
consideration are concerned and yet still fail because its objects are contrary to
the policy of the law [and natural justice].
Conclusion
Restraining clauses in employment contracts are enforceable if, there is a legitimate
interest which needs to be protected and the restraint is reasonable. Generally, if a
restraining clause is found to be unreasonable, then it will be void. In Lucys case, Lucy
could argue that the timeframe of three years and the area 30 kilometers of Lusaka
20

http://www.businesslawtoday.com.au/commercial-agreements/restraint-of-trade-clauses/ (visited 03/10/2015)

[1965] 1 All ER 1069.
22
[1916] 1 AC 688.
23
Smith and Thomas: A Casebook on Contract (11thedn)
21

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town is too wide and unreasonable. From the foregoing, it is clear that the restrictive
covenant was included in the covenant only to dissuade the employee from leaving.
Lastly, Lucys contract is not a contract for the special services, the promise not to work
for a competitor is most unlikely to be enforceable. Hence, the restraint clause is void
and unenforceable by Nissan Vehicle Services Ltd.

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BIBLIOGRAPHY
BOOKS
Cain A F Cain, Montanas Law Regarding Contracts in Restraint of Trade (30 Mont. L
Rev 1968)
Smith and Thomas, A Casebook on Contract (11th edn, Sweet and Maxwell London
2000)
Treitel G H, The Law of Contract (11th edn, Sweet & Maxwell London 2003)
Wilberforce, Richard, Campbell A and Elles N, The Law of Restrictive Practices and
Monopolies, (2nd edn, Sweet and Maxwel London, 1966)

CASES
Bulldogs Rugby League Club Ltd & anor v Williams & ors [2008] NSWSC 822
Herbert Morris Limited v Saxelby [1916] 1 AC 688.
Lumley v Wagner (1852) 1 De GM and G 604
Mitchel v Reynolds (1711) 1 P Wms 181
Patel v Patel (1985) Z.R. 220 (S.C
Stenhouse Australia Ltd v Phillips [1933] 1 Ch 935
SW Strange Ltd v Mann [1965] 1 All ER 1069.

WEBSITES
http://www.businesslawtoday.com.au/commercial-agreements/restraint-of-trade-clauses/
(visited 03/10/2015)
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