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Restraint of trade

ATF Services Pty Ltd v Ronald Chapman & Anor [2011] NSWSC 1024. Pembroke J.

Validity of Restraint

15 That leads me to the main issue, which is the validity of the restraint. The general principles applicable to the resolution of the issue as to whether a restraint of trade is valid are well known. But there are two significant preliminary matters that should be stated at the outset:

(a) The first is that contracts are meant to be observed. The general policy of the law is that people should honour their contracts. I referred to this consideration in Seven Network (Operations) Limited v Warburton (No 2) [2011] NSWSC 386 at [3].

(b) The second is that in contracts such as these, and especially where, as here, the party sought to be restrained received legal advice at the time of entry into the contract, considerable weight should be given to an acknowledgment by that party of the reasonableness of the agreed restraint periods. I also referred to those considerations in Seven Network (Operations) v Warburton (No 2) (supra) at [70] to [72].

16 The general principle, subject to those two preliminary matters, is that no matter what the parties have agreed, negative covenants imposing a restraint on trade will not be enforced if the restraint is not necessary for the reasonable protection of the legitimate interests of the person for whose benefit it was agreed: Buckley v Tutty (1971) 125 CLR 353 at 376; Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 at 346-8; Seven Network (Operations) v Warburton (No 2) (supra) at [4].

17 The predominant issue in this case, and the basis for the legitimate protection which the plaintiff seeks, is the goodwill and customer connection of the plaintiff. Confidential information also plays a minor part. In particular that means that there is a question as to whether reasonable people in the position of the parties would have expected that the performance of the agency agreement and the conduct of the business pursuant to it, would be likely to generate significant new goodwill in relation to that business which the plaintiff could reasonably protect by the restraint of trade provision: BB Australia Pty Ltd v Karioi Pty Ltd [2010] NSWCA 347 at [67].

18 An employee or agent is entitled, and is to be encouraged, to build up his own qualities of skill and experience. Equally, it is his duty to develop and improve the principal's business for the benefit of the principal. These two obligations interlock during the period of the agreement. After its termination they diverge and mark the boundary between what the agent may take with him and what he may legitimately be restrained from doing: BB Australia Pty Ltd v Karioi (supra) at [70] - [80]. It is therefore necessary to identify some advantage or asset inherent in the business which it would be unjust to allow the agent to appropriate for his own purposes even though the agent may have contributed to its creation.

19 The focus in cases such as these is the extent to which the agent is likely during the course of his agency to develop business relations with customers. If it is anticipated that an agent will develop personal connections with customers while acting in the course of his agency so that those customers may follow the agent to a new business it will usually be reasonable for the principal to impose some contractual restraint upon the agent: BB Australia Pty Ltd v Karioi (supra) at [81].

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