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Four year restraint reasonable to protect business’s goodwill

The Supreme Court of Victoria has upheld the validity of a four year non-compete restraint in the context of a business sale agreement¹

[1] Southern Cross Computer Systems Pty Ltd v Palmer (No 2) [2017] VSC 460.


This case confirms the courts will take a stricter view of restraints of trade in employment contracts than those contained in contracts for the sale of a business. This is particularly so in circumstances where a purchaser has paid a substantial amount of money for the relevant business.

The restraint 

An entity associated with the employee, Mr Palmer, sold its shares in Southern Cross Computers (the employer) for $3.5 million in 2016. The share sale agreement contained a restraint which prevented Mr Palmer from working for a competing business for a period of four years, from the date of the share sale agreement. Within a year of selling the shares, Mr Palmer started working for a competitor one day per week.

Protection of goodwill

The Court said the purchaser of the shares was ‘entitled to reasonable protection of the goodwill in the business attributable to that shareholding’. The Court acknowledged the purchaser of a business could not get what it was contracting to buy, without protecting the business’s goodwill by preventing the owner of that business exercising his or her personal knowledge and skill to its detriment.

The Court found that, on a plain reading of the restraint clause, the definition of competing business (referred to in the share sale agreement as a ‘Restricted Business’) was limited to businesses involved in IT procurement and associated IT managed services. These were the activities of Southern Cross at the date of the share sale agreement. Had the restraint sought to prevent Mr Palmer from working for a business that carried out services that Southern Cross only started performing after the date of the share sale agreement, the restraint would likely not have been enforceable.

Reminders for employers

Employers should take comfort from the fact that, particularly in the context of a business sale where goodwill is purchased, carefully drafted restraints may provide robust protection from key employees carrying out work for competitors.

 

AUTHORS
Emma Anderson | Senior Associate
T +61 2 6120 6239
emma.anderson@maddocks.com.au
Anna Smith | Associate
T +61 2 6120 6270
E anna.smith@maddocks.com.au
The Supreme Court of Victoria has upheld the validity of a four year non-compete restraint in the context of a business sale agreement¹

[1] Southern Cross Computer Systems Pty Ltd v Palmer (No 2) [2017] VSC 460.


This case confirms the courts will take a stricter view of restraints of trade in employment contracts than those contained in contracts for the sale of a business. This is particularly so in circumstances where a purchaser has paid a substantial amount of money for the relevant business.

The restraint 

An entity associated with the employee, Mr Palmer, sold its shares in Southern Cross Computers (the employer) for $3.5 million in 2016. The share sale agreement contained a restraint which prevented Mr Palmer from working for a competing business for a period of four years, from the date of the share sale agreement. Within a year of selling the shares, Mr Palmer started working for a competitor one day per week.

Protection of goodwill

The Court said the purchaser of the shares was ‘entitled to reasonable protection of the goodwill in the business attributable to that shareholding’. The Court acknowledged the purchaser of a business could not get what it was contracting to buy, without protecting the business’s goodwill by preventing the owner of that business exercising his or her personal knowledge and skill to its detriment.

The Court found that, on a plain reading of the restraint clause, the definition of competing business (referred to in the share sale agreement as a ‘Restricted Business’) was limited to businesses involved in IT procurement and associated IT managed services. These were the activities of Southern Cross at the date of the share sale agreement. Had the restraint sought to prevent Mr Palmer from working for a business that carried out services that Southern Cross only started performing after the date of the share sale agreement, the restraint would likely not have been enforceable.

Reminders for employers

Employers should take comfort from the fact that, particularly in the context of a business sale where goodwill is purchased, carefully drafted restraints may provide robust protection from key employees carrying out work for competitors.

 

AUTHORS
Emma Anderson | Senior Associate
T +61 2 6120 6239
emma.anderson@maddocks.com.au
Anna Smith | Associate
T +61 2 6120 6270
E anna.smith@maddocks.com.au