01 Apr 2016

Post-employment restraint after repudiation of an employment contract

By Abraham Ash and Elodie Cheesman

Can a party who has repudiated a contract of employment still enforce post-employment restraints? A recent decision sheds new light on this issue.

The enforceability and enforcement of postemployment restraints are matters which many employers and employment lawyers face. Putting aside the ‘typical’ issues regarding reasonableness and legitimate business interests, another issue is whether postemployment restraints continue to operate where an employer has repudiated the employment agreement. If the restraints are otherwise reasonable, will the employer deprive itself of a right to enforce the restraints in light of the manner in which the employment relationship has come to an end?

The recent decision of the Full Court of the South Australian Supreme Court in Richmond v Moore Stephens Adelaide Pty Ltd [2015] SASCFC 147 (‘Richmond’) sheds new light on this vexed issue. The Court rejected the claim that a restraint clause included in a number of business sale agreements was necessarily unenforceable by a party who repudiated the contract.

While this is obiter (because the Court decided that there was no repudiation on the facts, and on construction the restraint clauses would not have been enforceable upon repudiation) and the case did not specifically concern an employment contract, as an intermediate Court of Appeal decision, the reasoning in this case may be regarded by the judiciary as persuasive and may have significant implications from an employment perspective.

Pre-Richmond case law

A line of English and Australian cases had left the law on enforcement of contractual clauses by a repudiating party in a somewhat ambiguous state. In General Billposting Co Ltd v Atkinson [1909] AC 118 (‘General Billposting’), the House of Lords held that the employer’s repudiation precluded enforcement of a restrictive clause after termination of the contract.

In Rock Refrigeration Ltd v Jones [1997] 1 All ER 1, the English Court of Appeal held that General Billposting stands for the proposition that, as a matter of law, restraint clauses do not operate in favour of an employer whose repudiation led to termination of the contract by the employee.

In Australia, many years ago, the High Court in Kaufman v McGillicuddy (1914) 19 CLR 1 applied General Billposting and ruled that a restrictive covenant did not survive a rescission by an employee on the grounds of the employer’s repudiatory breach. While it is unclear whether the decision in Kaufman was based on construction of the contract or a rule of law, this principle has been cited in a number of cases since.

A number of NSW Supreme Court cases (which were not considered in Richmond) have more recently considered the issue. In Northern Tablelands Insurance Brokers Pty Ltd v Howell [2009] NSWSC 426, Barrett J held that the employer had repudiated the employment contract and therefore could not rely on the post-employment restraint clause in the contract.

In Fishlock v The Campaign Palace [2013] NSWSC 531, Sackar J held that because the agency had repudiated the contract, it was not entitled to the benefit of the restraint clause. 

In Pet Tech v Batson [2013] NSWSC 1954, Young AJ did not need to consider the doctrine, as it could not be found that there was a wrongful termination. Nevertheless, he alluded to confusion around the doctrine, saying:

"The General Billposting doctrine [the proposition that an employee’s post-employment restraint of trade obligations do not survive the termination of the employment contract where termination is effected by the employee accepting the employer’s repudiation of the contract] seems to be being queried by academic and other lawyers at present time and indeed it was even considered to be on shaky grounds by the Victorian Court of Appeal [in Bond v Rees Corporate Advisory Pty Ltd [2013] VSCA 13] but it is a doctrine that has been sanctioned by the High Court in the Kaufman case and I consider that as a single Judge I would need to follow it."

In the wake of these decisions, the Court in Richmond has attempted to clarify the case law, holding that just because a party has repudiated the contract, this does not necessarily mean that it cannot enforce a restrictive covenant. Rather, the Court must look to the contractual intention of the parties to determine whether the restraint clause was intended to apply in the event of the repudiation.

Richmond ‒ the background

Mr Richmond (a chartered accountant) and his company WKYA Consulting Pty Ltd (WKYA) had entered into two related agreements (the Business Sale Agreement and Service Agreement) with Moore Stephens Adelaide Pty Ltd for the sale of WKYA’s accountancy practice and professional accounting services to Moore Stephens.

The purchase price was dependent upon the level of Achieved Fees (as defined in the agreements) over the first three years. Each agreement contained a restraint clause whereby WKYA and Mr Richmond agreed not to solicit or deal with clients of the acquired business, or clients with whom they had dealings on behalf of Moore Stephens, and not to solicit employees of the acquired business.

A disagreement arose over the quantum of Achieved Fees. Mr Richmond claimed that Moore Stephens defaulted on the payment of interest on the balance of the purchase price, and that this constituted a breach or repudiation which justified termination of the agreements. Moore Stephens sued Mr Richmond in the District Court to enforce the restraint clauses. The trial judge held that the restraint clauses were enforceable, and granted an injunction restraining Mr Richmond from soliciting or dealing with named clients with whom he allegedly had had dealings on behalf of the business, and from soliciting employees.

Mr Richmond appealed the decision to the South Australian Supreme Court.

Appeal decision

The appeal raised the following questions:

i. Did the restraint clauses survive termination of the agreements if effected by WKYA and Mr Richmond for breach or repudiation?

ii. Were there discretionary reasons in equity not to enforce the restraint clauses?

Blue J, with whom Kourakis CJ and Stanley J agreed, held that while Moore Stephens was in breach of the Business Sale Agreement by failing to pay interest, Moore Stephens did not evince an unwillingness or inability to render substantial performance of the contract necessary to constitute repudiation. Therefore WKYA and Mr Richmond were not entitled to terminate the Business Sale Agreement.

While WKYA/Mr Richmond’s nonpayment of interest amounted to a breach of the Service Agreement due to cross-default provisions, this did not constitute a breach of an essential term of the Service Agreement, nor a sufficiently serious breach of an intermediate term as to justify termination.

As such, the Agreements, including the restraint clauses, remained on foot. Although WKYA and Mr Richmond were not entitled to terminate the Agreements, the Agreements had nevertheless been brought to an end and it was necessary for the Court to consider the restraint of trade issues.

No rule of law that a party who has repudiated a contract can never enforce a post-contract restraint clause In considering the legal principles relating to survival of restraint clauses on termination of a contract, the Court summarised the principles surrounding the general rule that ‘termination of a contract discharges both parties from the obligation to further perform duties otherwise required to be performed’ (McDonalds v Dennys Lascelles (1933) 48 CLR 457; Holland v Wiltshire (1954) 90 CLR 409) as a single rule:

"[T]ermination of a contract discharges those obligations of a party that are not contingent upon its subsistence or future events dependent on its subsistence or future obligations discharged by its termination. Whether an obligation is or is not contingent in this sense is to be determined as a matter of construction of the contract."

The Court rejected Mr Richmond’s argument that General Billposting is an authority for the proposition that it is a rule of law that a party who has repudiated a contract, leading to its termination by the innocent party, can never enforce a restraint clause expressed to operate after termination, and that this proposition was endorsed by the High Court in Kaufman. According to the Court, "Mr Richmond’s contention should be rejected because the question whether the restraint clause survives must depend on the proper construction of the contract".

The Court then looked to the intention of the parties in the instant case as evinced in the Agreements. On a proper construction of the Agreements, the restraint clauses survived termination of the Agreements by Moore Stephens, but would not have done so if Mr Richmond/ WKYA had validly terminated them for breach or repudiation. This was because the Court considered that:

i. the Business Sale Agreement and Service Agreement were ‘inextricably intertwined’ (for reasons including that breach of one agreement automatically amounted to breach of the other). It was unlikely that only the restraint clause in one Agreement (and not the other Agreement) was intended to survive termination for breach or repudiation; and

ii. the Service Agreement did not have express provisions for termination apart from termination by Moore Stephens for breach. The parties could not have intended that, absent such termination for breach, they were bound by the Agreement for eternity.

No reason in equity not to enforce the restraint clauses

The Court did not rule out enforcement in equity of restraint clauses by a party who has repudiated the contract. Rather, as at law, it is a matter of construction. In the instant case, the Court held that on the proper construction of the Business Sale Agreement and Service Agreement, the restraint obligations of WKYA and Mr Richmond were not dependent on Moore Stephens’ obligations to pay interest or to pay the service fee. WKYA/Mr Richmond’s and Moore Stephens’ obligations were not so related as to make it unfair to compel performance by Mr Richmond/WKYA in the absence of performance by Moore Stephens.

Significance

While the Court’s finding that there is no rule of law that a party who has repudiated a contract can never enforce a post-contract restraint clause is obiter because it was decided that there was no repudiation on the facts, and on construction the restraint clauses would not have been enforceable by Moore Stephens had it repudiated, the case still adds to the debate around enforcement of restraint clauses by a party who has repudiated a contract. Richmond suggests that there is no rule of Australian law preventing such enforcement. Rather, it is a matter of construction of the contract.

Lessons for employers

Richmond opens up the possibility of an employer enforcing post-employment restraint clauses even where the employer has repudiated the contract, provided that the post-employment restraint obligation has already accrued at the point of repudiation.

If employers intend that restraint clauses will apply once the contract ends, even in the event of repudiation by either party, it may be wise to expressly state in the employment contract that the restraints are a right which accrue to the employer immediately and which will survive termination and repudiation. While this would be a highly unusual form of drafting, it should be given some careful consideration. 

This article was first published in the Law Society Journal, April 2016.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.