CFO Leaves Just Jeans for Cotton On, Gets Sued

Having been subject to restraint provisions myself, I read with interest the judgement involving Just Group and Cotton On.  Restraint provisions are often important in a wide range of commercial contracts * and it is important to be fully across the current legal position when drafting, negotiating and enforcing restraints. 

 

Just Group Limited’s Chief Financial Officer resigned within the first 4 months of her employment, during her probationary period.  Shortly before her departure she informed Just Group that she was taking up employment with Cotton On Group Services Pty Ltd.   

 

Just Group wasted little time in bringing Court proceedings against the CFO to enforce a restraint of trade agreement entered into between the CFO and Just Group and stop the CFO from working for Cotton On.

Applying the principles summarised below, the Supreme Court of Victoria decided as follows:

 

  • The restraints were unreasonable and unenforceable.

  • The CFO was under no obligation to provide notice to Just Group in the event that she entered into discussions with a prospective employer during the course of her employment, despite a clause in her contract purportedly requiring her to do so.

 

The Principles

 

The Court applied the following established principles in assessing the enforceability of the restraint of trade provisions:

 

  • A contractual provision in restraint of trade is, void.

  • The presumption can, however, be rebutted and the restraint justified by the special circumstances of a particular case, if the restriction is reasonable by reference to the interests of the parties.

  • The validity of the covenant in a contract is to be judged as at the date of the employment agreement.

  • A stricter view is taken of covenants in restraint of trade in employment contracts than those contained in contracts for the sale of a business.

  • The onus of proving the special circumstances justifying the restraint is on the person seeking to enforce the covenant.

  • So far as the parties’ interests are concerned, the restraint must impose no more than adequate protection to a party in whose favour it is imposed. If the court is satisfied that the restraint confers greater protection than can be justified, there is no further issue of reasonableness.

  • The meaning of the restraint clause may be construed by reference to the factual matrix, documentary context and surrounding circumstances.

 

[Note: The Court applied the law in Victoria.  The position is different in New South Wales due to legislation dealing with restraints].

 

The Restraint Provisions

 

The restraint provisions in this case contained the usual “cascading clauses”, listing the restraint area as:

 

  • Australia and New Zealand; or (if this is held to be invalid)

  • Australia; or (if this is held to be invalid)

  • Victoria,

 

and the restraint period as:

 

  • 24 months after the Termination Date; or (if that period is held to be invalid)

  • 18 months after the Termination Date; or (if that period is held to be invalid)

  • 12 months after the Termination Date.

 

There was a comprehensive definition of what constituted restrained activity.

 

Various Comments

 

  • The facts that (a) the CFO acknowledged in the contract that the restraints were reasonable and that (b) she had been given the opportunity to obtain independent legal advice – did not prevent the Court from finding that the restraint provisions were unreasonable and unenforceable.

 

  • The definition for restrained activities was not clear and the Court stated that it was unable to re-write the clause to make it clear.

 

  • The Court stated that it would be unreasonable to impose a wide-ranging 12-month restraint on an employee who ends their employment during a probationary period within a short period of commencing employment.

 

  • Although the Court may have had the ability to strike out (“sever”) unreasonable sections of the restraint provisions, it was not prepared to “engage in the task of curial disentanglement to salvage a patently unreasonable restraint”.

 

Take Away

 

  • Factual analysis.  To give restraint provisions the best chance of being enforceable, there should be a factual analysis of what is reasonable in the particular circumstances before drafting the provisions.

 

  • Vague law.  It is difficult to determine whether a restraint is enforceable because it involves a value judgement as to what is “reasonable”, or more precisely a prediction of what a Judge may find to be unreasonable (which may not be the same as your view or that of your lawyer). 

 

  • Commercial approach.  It is generally important to do the best one can on a reasonable budget.  This can best be achieved by using an experienced commercial lawyer who is accustomed to drafting and negotiating restraint provisions and navigating the relevant law.

 

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Contact

If you would like to discuss any aspect of this article with us, or share your own experiences, please contact Rod Stumbles at +613 8692 7255 or here.

 

*For example (a) Business Sale Agreements, Share Sale Agreements and Share Buyback Agreements (restraining the vendor from competing with the business after sale), (b) Partnership Agreements, Shareholder/Unitholder Agreements and Joint Venture Agreements, (c) Distribution Agreements, Supply Agreements, Manufacturing Agreements, Franchise Agreements and Licensing Agreements, (d) Non-Disclosure / Confidentiality Agreements (restraining prospective investors from using information divulged to them by the business) and (e) Employment Agreements, Subcontractor Agreements, Consultancy Agreements and Service Agreements.

DISCLAIMER

 

This article provides general information only and is not intended to constitute legal advice.  No lawyer-client, solicitor-client or attorney-client relationship has been created between us.  You must not rely on the contents of this article, whether as an alternative to legal advice from a lawyer or other professional legal services provider or otherwise.  You should not take, discontinue or refrain from taking any action because your understanding of the contents of this article, including without limitation delay seeking legal advice or disregard legal advice.  If you have any specific questions about any matter, you should engage us or other lawyers or other professional legal services providers to provide you with the necessary advice.  Keep in mind that you may be facing important deadlines so you should not delay in engaging someone to provide you with the advice.

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