12 Jul 2010

Restraint of trade clauses

by Joe Catanzariti

Despite the presumption against the validity of restraint of trade clauses, defendants will not be able to escape from them easily, particularly where they had commercial justifications for entering into the agreement.

The Victorian Supreme Court has granted an application restraining two directors of the accounting firm BDO from defecting to a newly established rival (BDO Group Investments (NSW-Vic) Pty Ltd v Ngo [2010] VSC 206). The decision highlights that despite the fact there is a presumption against the validity of restraint of trade clauses, defendants will not be able to escape from them easily, particularly where they had commercial justifications for entering into the agreement.


The plaintiffs were various companies associated as holding or subsidiary companies in the BDO Group. The first and third defendants, Ngo and Beechey, were directors of BDO Pty Ltd. Ngo and Beechey intended to work for a firm which the plaintiffs submitted was a direct competitor of theirs. The rival firm was established by a former BDO Group Director, Daniel Allison. The plaintiffs sought interlocutory injunctive relief against the defendants, until the final hearing and determination of the matter.

The restraint covenants relied upon were contained in a sale agreement, a unit holders deed and an employment agreement. These agreements were entered into as part of one major transaction involving a merger between the Victorian accountancy practice of BDO Kendalls and the New South Wales and Australian Capital Territory accountancy practice of the BDO Group to form a combined practice. This involved the BDO Group acquiring the practices for a goodwill price of $75 million, which enabled large cash distributions and other benefits to be received by the directors and partners of the merged practices.

Restraints of trade in a commercial context

Justice Croft held that it was a significant consideration that the full trial was due to commence within approximately two months. Otherwise the defendants may have been able to successfully argue that granting interlocutory injunctive relief would practically put an end to the proceedings as the plaintiffs would thereby obtain all they seek.

It was common ground between both parties that a covenant in restraint of trade is presumed void and that it will only be enforced when it is established that the restraint does no more than is reasonably necessary to protect the legitimate interests of the parties for whose benefit it was imposed. It was also agreed that the onus rests on the party seeking to enforce the restraint to establish its validity.

Justice Croft held that in determining whether restraint provisions are reasonable in the context of the sale of a business, "the approach of the courts is essentially, based on commercial fairness and the need to hold parties to the bargain which they made". He cited the authority of Esso Petroleum Co Ltd v Harper's Garage, further holding that where the background to the agreement evidences some commercial justification on both sides, "the onus of establishing the reasonableness of the restraint should be easily discharged".

There is a clear difference in the court's approach depending on whether the restraint is contained in an agreement for the sale of goodwill, or whether it is with respect to employees. Justice Croft further held that there were significant issues and arguments to be raised, heard and determined at trial in relation to the proper construction of the restrictive covenant. This would involve, at trial, a careful consideration of any relevant aspects of the factual matrix of those agreements.

Balance of convenience

Justice Croft then considered whether the balance of convenience favoured the granting of the injunction.

The plaintiffs submitted that this was far from being an "exceptional case" and instead was a classic instance in which parties should be held to their bargain.

The defendants raised the issue of "relative hardship", which Justice Croft accepted was an aspect of the question of the balance of convenience. The hardship relied upon by the defendants was, in substance, that they would be prevented from pursuing their careers with Allison, rather than the BDO Group.

Justice Croft held that the claim of hardship had to be considered in the context of the relief sought by the plaintiff and the terms upon which that relief was sought.

The plaintiffs proposed, as a condition of the grant of interlocutory relief, that the defendants would continue to receive their current rate of remuneration, whether they attended to work for the BDO Group or not. The current rate of remuneration, in addition to salary, included distributions of profit at their present band level. Consequently, the plaintiffs submitted that the only hardship the defendants would suffer would be to be restrained from breaching their contractual obligations for a few months until the matter was finally determined at trial. Justice Croft accepted this and held that the defendants would suffer "no relevant hardship" if the interlocutory injunction were granted.

Justice Croft had regard to the defendants' assertion that the plaintiffs' ulterior motive was to interfere with Mr Allison's attempt to establish his own practice and service former clients of BDO. However Justice Croft held that this was merely speculation and the desire of Ngo and Beechey to pursue their careers had to be "moderated by observance of contractual arrangements by which they are bound, the proper construction of which is to be determined at trial". Moreover, the relevant prejudice caused to the plaintiffs as a result of the departure of the defendants was likely to be serious.

Damages not an adequate remedy

Justice Croft did not accept the defendants' argument that damages would be an adequate remedy in these circumstances. This ruling was primarily based on his belief that the application raised "significant difficulties with respect to the calculation of loss and damage".

The defendants had argued that there were liquidated damages provisions in the agreements and the plaintiff could not assert that damages were an inadequate remedy when they had included a term in the contract purportedly containing a genuine pre-estimate of loss.

However, in Justice Croft's view, the liquidated damages provisions were not directed at a situation of breach or impending breach, as in the present circumstances and did not detract from the view that damages were not an adequate remedy. He held that the interim order should be made as an interlocutory injunction on the same basis and undertakings which supported the interim order.


This case illustrates a situation where a restraint of trade covenant can be effectively used on an interim basis. It remains to be seen whether the restraint in this case will be given its full effect after a complete construction of its terms at trial. Despite the fact that restraint of trade clauses are presumed to be void, the reasoning of Justice Croft indicates that where there appears to have been some commercial justification on both sides for entering into the agreement, the plaintiff's onus of proving the validity of the restraint may be discharged.

This article was written when Joe Catanzariti was a partner at Clayton Utz and does not necessarily reflect his views as Vice-President of the Fair Work Commission.

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