Commercial, Corporate, Employment, Mergers and Acquisitions

Restraints: Business sale agreements vs. employment contracts

10 December, 2017

Restraint clauses are not ‘one size fits all’. Typically, courts look less favourably on restraints imposed on an employee than restraints imposed on a vendor to protect the goodwill of a business in a sale. So to be enforceable, restraints need to be considered and drafted appropriately for the circumstances for which they are being used.

In Australia, restricting a person’s freedom to work for a competitor is generally contrary to public policy. A provision in an agreement (be it in an employment or sale of business context) that purports to restrain a person in this way will generally be void, unless the restriction is reasonable having regard to the interests of the parties and the interests of the broader public.

A non-compete is unreasonable and unenforceable if it extends beyond what is necessary to protect the person for whose benefit the restraint is being imposed. Determining what is necessary is driven by the facts of a matter and, accordingly, the enforceability of a restraint clause is determined on a case by case basis.

In the context of a business sale it can be acceptable to impose a restraint for several years post the sale date, but courts will generally take a less favourable view of lengthy restraints placed on employees. While there is little difference in the structure and form of a restraint clause in each context, what is considered reasonable in the sale of a business context will not necessarily be considered reasonable in an employment context.

Where the goodwill of a business has been sold, a court is generally more focused on commercial fairness and the need to hold the parties to the bargain that they have struck. In an employment context, the courts recognise that there is an inequality of bargaining power and that the individual concerned will often have no other way to make a living.

Restraints of trade in business sale agreements

A buyer will typically insist that the sale documents in an acquisition incorporate a restraint of trade restricting the seller’s ability to compete for a minimum period post the sale date. This is primarily to protect the buyer from competition that may prejudice the value of the goodwill in the target.

Courts have generally upheld clauses that restrain a seller’s post-completion conduct on the basis that the buyer is entitled to reasonable protection of the goodwill that they have purchased, particularly where valuable consideration has been paid for it. Compared to restraints imposed on employees, the restraint in a business sale context can be lengthy.

In Southern Cross Computer Systems Pty Ltd v Palmer (No 2), Mr Palmer was restrained from engaging in a competing business providing IT procurement and management services in Australia for four years after selling his 40% shareholding in Ingenio Group Pty Ltd to Southern Cross Computers Pty Ltd (Southern Cross).

Mr Palmer was subsequently contracted by a competitor, but the Supreme Court of Victoria ultimately found that the restraint provision in the share sale agreement was valid and enforceable. The Court took into consideration the fact that Mr Palmer had freely entered into the share sale agreement and had received $3.5 million as consideration. The Court noted that the restraint was suitably limited to protect the business as it was being carried out at the date of the sale and was reasonable in its geographic reach and the period of operation.

Before enforcing a restraint, a court will need to be satisfied that the scope of the restraint is reasonable. In Freedom Finance Accounting Pty Ltd v Goldstein, Freedom Finance Accounting Pty Ltd (Freedom) entered into a share sale agreement to purchase Mr Goldstein’s 50% shareholding in an accounting firm for $358,500. Mr Goldstein was restrained from providing accounting services and non-accounting services for a period of three years. After his resignation, Mr Goldstein commenced work with a suburban accounting firm, requiring Freedom to seek an order enforcing the restraints against Mr Goldstein.

The Court held that the restraint on Mr Goldstein was too wide. The restraint extended to services of a kind that Mr Goldstein never provided to his clients and had no reference to the goodwill acquired by Freedom. Further, the non-compete area and the period of operation extended beyond what was necessary for Freedom to consolidate the business and take advantage of the goodwill that it had purchased.

Restraints of trade in employment contracts

For a restraint imposed by an employer to be enforceable, it must be directed at protecting an employer’s legitimate proprietary interest (such as its confidential information, customer connections or a stable workforce).

In Thinkstorm Pty Ltd v Farah, Mr Farah, a specialist in WorkBrain software, was employed by Thinkstorm Pty Ltd (Thinkstorm), a recruitment agency, and assigned to work for one of Thinkstorm’s clients, Queensland Health.

Mr Farah later resigned from Thinkstorm and commenced employment with a competing recruitment agency, Paxus Australia Pty Ltd (Paxus). He was then reassigned to Queensland Health through Paxus. Following this, Thinkstorm sought to enforce a restraint in its employment contract with Mr Farah to prevent him from providing WorkBrain services to Queensland Health for a period of 12 months.

When considering the validity of the restraint, the New South Wales Supreme Court acknowledged that Thinkstorm had built a relationship with Queensland Health, independent of Mr Farah. This relationship manifested itself in business goodwill, which was a legitimate protectable interest. The Court held that the restraint was reasonable in scope to protect that interest. The restraint did not prevent Mr Farrah from providing his professional services to other parties and the 12-month period of operation, while at the “outer limit”, was considered reasonable in the circumstances.

The courts recognise the broader public interest in ensuring individuals can work and compete freely and adopt a strict approach towards restraints imposed in the employment context. Notwithstanding this general position, as this case demonstrates, a restraint that is reasonable and directed towards protecting a legitimate interest may be enforceable.

Where an employee will continue to be paid during the period of a restraint, the court may consider a longer restraint period to be reasonable.

Summary

In a business sale agreement, a restraint should be aimed at protecting the business as it was being carried out at the time of completion.
In an employment contract, a restraint must be directed at protecting the employer’s proprietary interest. The “reasonableness” of the restraint is considered as at the time the contract was entered – not when the employment came to an end.
Once a protectable interest is established, the restraint should be crafted in such a way as to protect that interest. The restraint must be reasonable in extent, duration and geographic reach.
Whether a restraint is enforceable will be determined on a case by case basis. For this reason, we usually recommend clients consider using a cascade clause to assist in ensuring “reasonableness” when defining the period of operation and geographic reach.
In the context of a sale of business where vendors or associates of vendors will be employed in the target’s business on a continuing basis, a buyer should ensure that separate restraints are negotiated that have regard to the different contexts in which they are being sought.

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Litigation and Dispute Resolution

Canadian Court elevates thumbs-up emoji to signature status

In June 2023, a Canadian Court in South-West Terminal Ltd v Achter Land and Cattle Ltd, 2023 SKKB 116, held that the "thumbs-up" emoji carried enough weight to constitute acceptance of contractual terms, analogous to that of a "signature", to establish a legally binding contract. Facts This case involved a contractual dispute between two parties namely South-West Terminal ("SWT"), a grain and crop inputs company; and Achter Land & Cattle Ltd ("ALC"), a farming corporation. SWT sought to purchase several tonnes of flax at a price of $17 per bushel, and in March 2021, Mr Mickleborough, SWT's Farm Marketing Representative, sent a "blast" text message to several sellers indicating this intention. Following this text message, Mr Mickleborough spoke with Mr Achter, owner of ALC, whereby both parties verbally agreed by phone that ALC would supply 86 metric tonnes of flax to SWT at a price of $17 per bushel, in November 2021. After the phone call, Mr Mickleborough applied his ink signature to the contract, took a photo of it on his mobile phone and texted it to Mr Archter with the text message, "please confirm flax contract". Mr Archter responded by texting back a "thumbs-up" emoji, but ultimately did not deliver the 87 metric tonnes of flax as agreed. Issues The parties did not dispute the facts, but rather, "disagreed as to whether there was a formal meeting of the minds" and intention to enter into a legally binding agreement. The primary issue that the Court was tasked with deciding was whether Mr Achter's use of the thumbs-up emoji carried the same weight as a signature to signify acceptance of the terms of the alleged contract. Mr Mickleborough put forward the argument that the emoji sent by Mr Achter conveyed acceptance of the terms of the agreement, however Mr Achter disagreed arguing that his use of the emoji was his way of confirming receipt of the text message. By way of affidavit, Mr Achter stated "I deny that he accepted the thumbs-up emoji as a digital signature of the incomplete contract"; and "I did not have time to review the Flax agreement and merely wanted to indicate that I did receive his text message." Consensus Ad Idem In deciding this issue, the Court needed to determine whether there had been a "formal meeting of the minds". At paragraph [18], Justice Keene considered the reasonable bystander test: " The court is to look at “how each party’s conduct would appear to a reasonable person in the position of the other party” (Aga at para 35). The test for agreement to a contract for legal purposes is whether the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract (Aga at para 36). The question is not what the parties subjectively had in mind, but rather whether their conduct was such that a reasonable person would conclude that they had intended to be bound (Aga at para 37)." Justice Keene considered several factors including: The nature of the business relationship, notably that Mr Achter had a long-standing business relationship with SWT going back to at least 2015 when Mr Mickleborough started with SWT; and The consistency in the manner by which the parties conducted their business by way of verbal conversation either in person or over the phone to come to an agreement on price and volume of grain, which would be followed by Mr Mickleborough drafting a contract and sending it to Mr Achter. Mr Mickleborough stated, "I have done approximately fifteen to twenty contracts with Achter"; and The fact that the parties had both clearly understood responses by Mr Achter such as "looks good", "ok" or "yup" to mean confirmation of the contract and "not a mere acknowledgment of the receipt of the contract" by Mr Achter. Judgment At paragraph [36], Keene J said: "I am satisfied on the balance of probabilities that Chris okayed or approved the contract just like he had done before except this time he used a thumbs-up emoji. In my opinion, when considering all of the circumstances that meant approval of the flax contract and not simply that he had received the contract and was going to think about it. In my view a reasonable bystander knowing all of the background would come to the objective understanding that the parties had reached consensus ad item – a meeting of the minds – just like they had done on numerous other occasions." The court satisfied that the use of the thumbs-up emoji paralleled the prior abbreviated texts that the parties had used to confirm agreement ("looks good", "yup" and "ok"). This approach had become the established way the parties conducted their business relationship. Significance of the Thumbs-Up Emoji Justice Keene acknowledged the significance of a thumbs-up emoji as something analogous to a signature at paragraph [63]: "This court readily acknowledges that a thumbs-up emoji is a non-traditional means to "sign" a document but nevertheless under these circumstances this was a valid way to convey the two purposes of a "signature" – to identify the signator… and… to convey Achter's acceptance of the flax contract." In support of this, Justice Keene cited the dictionary.com definition of the thumbs-up emoji: "used to express assent, approval or encouragement in digital communications, especially in western cultures", confirming that the thumbs-up emoji is an "action in an electronic form" that can be used to allow express acceptance as contemplated under the Canadian Electronic Information and Documents Act 2000. Justice Keene dismissed the concerns raised by the defence that accepting the thumbs up emoji as a sign of agreement would "open the flood gates" to new interpretations of other emojis, such as the 'fist bump' and 'handshake'. Significantly, the Court held, "I agree this case is novel (at least in Skatchewan), but nevertheless this Court cannot (nor should it) attempt to stem the tide of technology and common usage." Ultimately the Court found in favour of SWT, holding that there was a valid contract between the parties and that the defendant breached by failing to deliver the flax. Keene J made a judgment against ALC for damages in the amount of $82,200.21 payable to SWT plus interest. What does this mean for Australia? This is a Canadian decision meaning that it is not precedent in Australia. However, an Australian court is well within its rights to consider this judgment when dealing with matters that come before it with similar circumstances. This judgment is a reminder that the common law of contract has and will continue to evolve to meet the everchanging realities and challenges of our day-to-day lives. As time has progressed, we have seen the courts transition from sole acceptance of the traditional "wet ink" signature, to electronic signatures. Electronic signatures are legally recognised in Australia and are provided for by the Electronic Transactions Act 1999 and the Electronic Transactions Regulations 2020. Companies are also now able to execute certain documents via electronic means under s 127 of the Corporations Act. We have also seen the rise of electronic platforms such as "DocuSign" used in commercial relationships to facilitate the efficient signing of contracts. Furthermore, this case highlights how courts will interpret the element of "intention" when determining whether a valid contract has been formed, confirming the long-standing principle that it is to be assessed objectively from the perspective of a reasonable and objective bystander who is aware of all the relevant facts. Overall, this is an interesting development for parties engaging in commerce via electronic means and an important reminder to all to be conscious of the fact that contracts have the potential to be agreed to by use of an emoji in today's digital age.

Published by Foez Dewan

29 August, 2023

Government

Venues NSW ats Kerri Kane: Venues NSW successful in overturning a District Court decision

The McCabes Government team are pleased to have assisted Venues NSW in successfully overturning a District Court decision holding it liable in negligence for injuries sustained by a patron who slipped and fell down a set of steps at a sports stadium; Venues NSW v Kane [2023] NSWCA 192 Principles The NSW Court of Appeal has reaffirmed the principles regarding the interpretation of the matters to be considered under sections5B of the Civil Liability Act 2002 (NSW). There is no obligation in negligence for an occupier to ensure that handrails are applied to all sets of steps in its premises. An occupier will not automatically be liable in negligence if its premises are not compliant with the Building Code of Australia (BCA). Background The plaintiff commenced proceedings in the District Court of NSW against Venues NSW (VNSW) alleging she suffered injuries when she fell down a set of steps at McDonald Jones Stadium in Newcastle on 6 July 2019. The plaintiff attended the Stadium with her husband and friend to watch an NRL rugby league match. It was raining heavily on the day. The plaintiff alleged she slipped and fell while descending a stepped aisle which comprised of concrete steps between rows of seating. The plaintiff sued VNSW in negligence alleging the stepped aisle constituted a "stairwell" under the BCA and therefore ought to have had a handrail. The plaintiff also alleged that the chamfered edge of the steps exceeded the allowed tolerance of 5mm. The Decision at Trial In finding in favour of the plaintiff, Norton DCJ found that: the steps constituted a "stairwell" and therefore were in breach of the BCA due to the absence of a handrail and the presence of a chamfered edge exceeding 5mm in length. even if handrails were not required, the use of them would have been good and reasonable practice given the stadium was open during periods of darkness, inclement weather, and used by a persons of varying levels of physical agility. VNSW ought to have arranged a risk assessment of the entire stadium, particularly the areas which provided access along stepped surfaces. installation of a handrail (or building stairs with the required chamfered edge) would not impose a serious burden on VNSW, even if required on other similar steps. Issues on Appeal VNSW appealed the decision of Norton DCJ. The primary challenge was to the trial judge's finding that VNSW was in breach of its duty of care in failing to install a handrail. In addition, VNSW challenged the findings that the steps met the definition of a 'stairwell' under the BCA as well as the trial judge's assessment of damages. Decision on Appeal The Court of Appeal found that primary judge's finding of breach of duty on the part of VNSW could not stand for multiple reasons, including that it proceeded on an erroneous construction of s5B of the Civil Liability Act 2002 and the obvious nature of the danger presented by the steps. As to the determination of breach of duty, the Court stressed that the trial judge was wrong to proceed on the basis that the Court simply has regard to each of the seven matters raised in ss 5B and 5C of the CLA and then express a conclusion as to breach. Instead, the Court emphasised that s 5B(1)(c) is a gateway, such that a plaintiff who fails to satisfy that provision cannot succeed, with the matters raised in s 5B(2) being mandatory considerations to be borne in mind when determining s 5B(1)(c). Ultimately, regarding the primary question of breach of duty, the Court found that: The stadium contained hazards which were utterly familiar and obvious to any spectator, namely, steps which needed to be navigated to get to and to leave from the tiered seating. While the trial judge considered the mandatory requirements required by s5B(2) of the CLA, those matters are not exhaustive and the trial judge failed to pay proper to attention to the fact that: the stadium had been certified as BCA compliant eight years before the incident; there was no evidence of previous falls resulting in injury despite the stairs being used by millions of spectators over the previous eight years; and the horizontal surfaces of the steps were highly slip resistant when wet. In light of the above, the Court of Appeal did not accept a reasonable person in the position of VNSW would not have installed a handrail along the stepped aisle. The burden of taking the complained of precautions includes to address similar risks of harm throughout the stadium, i.e. installing handrails on the other stepped aisles. This was a mandatory consideration under s5C(a) which was not properly taken into account. As to the question of BCA compliance, the Court of Appeal did not consider it necessary to make a firm conclusion of this issue given it did not find a breach of duty. The Court did however indicated it did not consider the stepped aisle would constitute a "stairway" under the BCA. The Court of Appeal also found that there was nothing in the trial judge's reasons explicitly connecting the risk assessment she considered VNSW ought to have carried out, with the installation of handrails on any of the aisles in the stadium and therefore could not lead to any findings regarding breach or causation. As to quantum, the Court of Appeal accepted that the trial judge erred in awarding the plaintiff a "buffer" of $10,000 for past economic loss in circumstances where there was no evidence of any loss of income. The Court of Appeal set aside the orders of the District Court and entered judgment for VNSW with costs. Why this case is important? The case confirms there is no obligation in negligence for owners and operators of public or private venues in NSW to have a handrail on every set of steps. It is also a welcome affirmation of the principles surrounding the assessment of breach of duty under s 5B and s 5C of the CLA, particularly in assessing whether precautions are required to be taken in response to hazards which are familiar and obvious to a reasonable person.

Published by Leighton Hawkes

18 August, 2023

Litigation and Dispute Resolution

Expert evidence – The letter of instruction and involvement of lawyers

The recent decision in New Aim Pty Ltd v Leung [2023] FCAFC 67 (New Aim) has provided some useful guidance in relation to briefing experts in litigation.