Restraint of Trade and Cascading Clauses: How It All Came Tumbling Down!

spectacular-waterfalls-0068The recent decision of Victoria’s Court of Appeal in Just Group Limited v Peck [2016] VSCA 334 (20 December 2016) is a timely reminder to exercise care when drafting restraint of trade clauses.

Even when “cascading” provisions are used, parties should not expect the court to do the work of making an agreement for them.

The case concerned a restraint imposed by Just Group Limited to prevent its CFO, Ms Peck from joining a competitor, Cotton On.

 

The clause cascaded from greater to lesser alternatives in:

  • area
  • duration; and
  • restricted activity.

The maximum combination of area, duration and restricted activity was expressed to operate “unless a court holds otherwise”; and the lesser alternatives were expressed only to take effect if the greater were “held to be invalid”. That, of course, could only happen after a judicial determination and must have created some doubt as to what the parties had actually agreed.

There was no stipulation that each combination of area, duration and restricted activity was able to take effect as a separate restraint without judicial intervention .

Instead, there was a provision that said:

“…the restrictions are intended to operate to the maximum extent permissible by law and, for the avoidance of doubt, the geographic region, restricted period – personal engagement, and restricted period – engagement of others is that set out in paragraph (a) of their respective definitions unless a court holds otherwise.”

Note: Paragraph (a) in each case was the greatest stipulated restraint before cascading down through subsequent paragraphs.

Unfortunately, not much doubt was avoided!

The court at first instance found the clause to be excessive and refused to sever the excessive parts.

On appeal, the Court of Appeal, held that the clause “could not be construed as a combination of several distinct covenants”, but was a single covenant containing restricted activities that were wider than was necessary for the protection of Just Group’s legitimate interests.

The Court examined the clause and, after referring to earlier authority, held that there was “a single all-embracing restraint” and that “to break it up into a number of separate restraints [would be] to change the nature of the intended contract”.

In short, the Court refused to do what should have been the work of the parties. The Court’s comments toward the ends of its reasons are telling in that regard:

In Putsman v Taylor, Salter J said that whether a promise is ‘separate or not depends on the language of the document. Severance, as it seems to me, is the act of the parties, not of the court’. In our opinion, for the Court to sever … (with the knowledge of what has occurred since the parties entered into the agreement) is to ‘reason backwards from allegation of “breach“ to construction and evaluation of the contract, rather than by an assessment of validity of the restraints at the time the contract was made’…. It is not for the Court to make a new agreement for the parties. As was stated by Heydon J writing extra-judicially:

“The courts are referees, not players; they are not supposed to waste their time adapting illegal covenants at the instance of those who seek to benefit from the illegality.”

In this instance, the parties may have done better to have structured their covenant as one that gave rise to separate restraints formed from various combinations of area, duration and activity – each of which was capable of operating without the need for court intervention.

Andrew C. Wood

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