Milk, One Sugar and a Restraint Please

Employers invest time and money training new staff.  Understandably, most employers do not like to see that investment used against them (such as when former employees set up competition next door).  Restraints of trade in employment agreements can be an effective temporary tool in creating protection from such situations. 

A Wellington-based chain of coffee outlets recently obtained an interim injunction from the Court of Appeal to restrain a former employee from operating a coffee cart in the near vicinity to one of its outlets (Fuel Espresso Ltd v Hsieh).

Fuel operates ten small coffee outlets throughout Wellington City.  A former employee that Fuel had trained as a barista began operating a coffee cart close to a Fuel outlet.  Fuel saw the risk of its customers defecting to the new competition and took action.  It sought to enforce a three month period of restraint in the former employee's employment agreement.

The Employment Court heard the application for an injunction under urgency.  It dismissed the application on the grounds that no consideration had been given for the restraint of trade.  Fuel appealed.

The Court of Appeal confirmed that the law does not enquire into the adequacy of consideration, nor does it require an extra "premium" for a restraint over and above the consideration for the underlying employment agreement.  In contract law even mutual promises can be consideration for each other.  However, the Court did find that the adequacy of consideration may be relevant to the question of whether a restraint is reasonable.  As that was not an issue in the Fuel case, the Court granted the interim injunction restraining the former employee from running his coffee cart.

When entering into an employment agreement with a new employee, employers should consider whether a restraint of trade clause would be helpful to protect its business and/or whether confidentiality and non-solicitation provisions would provide adequate protection.  It is important to be aware that not every restraint is going to be enforceable by the courts.  An employer must show that a restraint is reasonable in order to have it enforced.  As a general rule of thumb, the following factors will be taken into account in determining whether a restraint is enforceable to protect an employer's proprietary interests:

• the specified activities to be restrained
• the period of the restraint
• the geographical limits
• the parties' own view of reasonableness and adequacy of consideration
• the importance of the position
• inability to obtain other work

Some forward planning and a carefully drafted restraint of trade clause can provide an employer with valuable protection.

If you have any questions regarding restraints of trade, or if you require any assistance, please do not hesitate to contact us.

For more information, please contact:

Erin Davies
Partner
t: +64 9 979 2177
m: +64 29 622 2300
e: Erin Davies

Last updated: 20 October 2008

This article is intended to be brief in nature and should be used for information only. It should not be relied on as legal advice.