Protecting your business

Restraints during “gardening leave” upheld

The NSW Court of Appeal (1) has confirmed the right of employers to protect their businesses by imposing post-employment obligations on departing senior executives.

Facts

Lou Jardin was the CEO of IGA Distribution, the principal subsidiary of Metcash Ltd (Metcash). After a falling out with the parent company’s CEO, he and Metcash entered into a Deed of Release (Deed) on 19 February 2010 regarding the termination of his employment.

On 1 June 2010, in accordance with the Deed, Metcash gave Mr Jardin nine months’ written notice of termination, and directed him to take “gardening leave” on full pay. In the Deed, the parties agreed that Mr Jardin would continue to be bound by the obligations in his employment contract (Contract), in particular, restraints against him being involved in any competitive business.

Despite still being employed by IGA Distribution, from 1 July 2010 to 4 August 2010, Mr Jardin negotiated with SPAR Australia Ltd (SPAR), a competitor of Metcash, in relation to a potential involvement in its business.

On 16 July 2010, Mr Jardin gave written notice to Metcash purporting to terminate the Contract “with immediate effect”, and then on 26 July 2010 gave a further written notice purporting to terminate the Contract with effect from 26 October 2010.

Metcash began proceedings against Mr Jardin on 21 July 2010 and was successful a month later in obtaining interim orders against Mr Jardin being involved in any way with SPAR. Mr Jardin appealed the decision.

Decision

The court held that Mr Jardin was not entitled to give notice terminating the Contract and therefore any such notice was invalid. It held that the Deed reflected a negotiated agreement between the parties to the exclusion of any prior agreement. Accordingly, Mr Jardin’s employment could not have been terminated by either party prior to 1 March 2011.

The court also confirmed that, from the date of the Deed onwards, Mr Jardin continued to be bound by the obligations in the Contract, including that he comply with the relevant restraints. The relevant test for the validity of the restraints was whether they exceeded what was reasonably necessary to protect the legitimate interests of Metcash.

Mr Jardin argued that Metcash had not demonstrated that he had acquired “an enduring influence over its customers such as to enable him to ‘control’ the customers’ connection with Metcash as a ‘personal asset’”. The court did not agree, saying that an employer is entitled to protection against the possibility of its business connections being undermined by the employee’s personal knowledge and influence of its clients.

As such, the court found that the restraints were reasonable, given that Mr Jardin had over 10 years’ experience as a senior Metcash employee, and had acquired sufficient knowledge and influence over Metcash’s customers to justify a restraint directed at protecting its customer connections. In addition, it was noted that Mr Jardin was privy to and, indeed, held confidential information that could still be used to the detriment of Metcash.

Bottom line for employers

  • Courts may be more willing to enforce restraint of trade clauses that are precisely drafted and where it is clear that there are distinct client relationships or confidential information to be protected.
  • It is more likely that a restraint will be upheld if a company has encouraged free negotiations and the employee had legal representation to negotiate a mutually acceptable restraint provision. It was significant in Jardin that the restraint was to operate in circumstances where Mr Jardin continued to be paid by his employer and that this was the outcome of negotiations between both parties.

(1) Jardin and Jardim Investments Pty Ltd v Metcash Ltd and Metcash Trading Ltd [2011] NSWCA 409
This article was reproduced with permission from Lander & Rogers.
For further information, please contact Daniel Proietto | Partner, Workplace Relations & Safety ( dproietto@landers.com.au) or Amie Frydenberg | Senior Associate, Workplace Relations & Safety ( afrydenberg@landers.com.au).