ALERT: Post employment termination restraints – enforceability where termination occurs by reason of Employer’s repudiatory conduct

A very recent decision of McDonald J in the Victorian Supreme Court (Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163, 4 April 2017) deserves the attention of anyone who deals with issues relating to post termination restraints in employment, whether that be in the formulation of contractual clauses on that subject, or the meaning, effect and/or enforceability of existing contractual clauses.

The decision deals with several important principles and issues that arose in relation to post termination restraints. However, the part of the decision that is perhaps of most general interest and significance deals with whether post termination restraints are enforceable where the employment is terminated by the employer’s repudiatory conduct and the employee’s accepting the repudiation.

McDonald J found that the employment contract in the case before the court had been terminated in that way.

In that context, His Honour at paragraphs [134]-[159] went on to conclude that, even though the contract in question provided that the post termination restraint obligations ‘survive the termination of the Employment in all circumstances and for any reason’ (underlining added), the current state of authorities meant that the post termination restraint obligations were unenforceable.

In so holding, McDonald J noted that while the relevant authorities dictated that conclusion, competing rationales had been advanced for it. His Honour also found that there had not yet been an authoritative statement as to the precise path of legal reasoning by which that basic conclusion is reached.

A particularly interesting part of His Honour’s discussion of the competing rationales for the basic conclusion established by the authorities, concerns whether the rationale may lie in the application of the conventional restraint of trade analysis, namely, whether the restraints in question are reasonable having regard to the interests of the parties and the public.

In that part of the decision, McDonald J referred to a hypothetical situation in which the employer in the case before him wrongly accused the employee defendant of misconduct and suspended him without pay. In the example, the employee defendant then (correctly) treated the employer’s conduct as repudiatory and accepted the repudiation, bringing the employment agreement to an end.

His Honour observed that in that case, the effect of the survival of obligations clause in the case before him would be to render the post termination restraints unenforceable ‘as an unreasonable restraint of trade’: at [158].

That example underlines how the question of whether or not an employer, say, was entitled to dismiss an employee for serious misconduct, can have direct and serious implications for the enforceability of post termination restraints against the employee.

That is to say, a real and substantial dispute about the entitlement of the employer to dismiss summarily might affect the capacity of an employer to obtain interlocutory restraining orders. Indeed, if a Court ultimately held a summary dismissal unwarranted, that would raise a substantial question as to whether any post termination restraints were enforceable against the dismissed employee.

Disclaimer: This bulletin is published for general information purposes only and is not intended to and does not constitute the provision of legal advice.

Author: Glen Bartlett