Alert

The Victorian Court of Appeal has affirmed that post termination restraints in an employment contract were unenforceable because the employment termination occurred by reason of the employer’s repudiation of employment contract and the employee’s acceptance of that repudiation: Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSCA 181


The decision of the trial judge, Justice Michael McDonald, in Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163 was the subject of our ALERT published on 5 April 2017.

The focus of that Alert was on the conclusion reached by McDonald J that even though the employment contract in question expressly provided that the post termination restraint obligations contained in it ‘survive the termination of the Employment in all circumstances and for any reason’ and the restraints were otherwise enforceable, the current state of authorities dictated the conclusion that where employment terminates because of acceptance by an employee of an employer’s repudiatory act (termination by employer repudiation), post termination restraint obligations are unenforceable.

The decision was taken on appeal to the Victorian Court of Appeal both on grounds relating to whether there was contractual repudiation by the employer and the correctness of the trail judge’s conclusion that the restraint was unenforceable because it was a termination by employer repudiation. The appeal was expedited.

The restraint in question precluded the ex-employee for a period of 12 months after termination of employment from engaging in competition with his ex-employer in a business situated within five kilometres of the location where the ex-employee had worked for the ex-employer, and from soliciting work from clients of the ex-employer with whom the ex-employee had had direct dealings.

The appeal challenges were rejected by the Court of Appeal (Ashley, Priest and Beach JJA).

On the enforceability of post termination restraints/termination by employer repudiation issue, the Court of Appeal affirmed the trial judge’s conclusion.

In reasoning to that conclusion, the Court of Appeal stated at para [193(4) and (5)] that:

  • ‘A series of decisions in the High Court, and in courts of high authority in England and Canada, have stated, over the course of more than a century, that a restraint clause is not enforceable against an employee whose employment ends by the employer’s wrongful conduct — whether it be wrongful dismissal or the employee’s acceptance of the employer’s repudiatory conduct. Sometimes, that affirmation has been the ratio of the decision. In other instances, it has been by way of obiter dictum. (underling added)
  • There appeared to be no reported case in a court of superior jurisdiction in Australia or England which has decided that a restraint clause is enforceable against a former employee in such circumstances.

 

Then at para [271] the Court of Appeal stated:

In summary, the authorities show, as we have previously noted, a consistent trend, though with different juridical explanations — denying to an employer who has repudiated a contract of employment, such repudiation having been accepted by the employee, reliance upon a restraint clause against the employee.’

In its reasoning, the Court of Appeal also observed that:

  • A number of rationales had been offered why a restraint clause had not been held enforceable in the case of termination by reason of acceptance of the employer’s repudiatory conduct (A point which made in the reasons of McDonald J at first instance and to which attention was drawn in our original Alert.)
  • Although some of the relevant decisions treated the proposition as a (invariable) ‘rule of law’ which dictates the unenforceability result in every factual situation involving an employee’s acceptance of an employer’s repudiation of the contract between them, it was not necessary to conclude that there is a ‘rule of law’ to that effect – it was enough to say that all the cases illustrate at least that all factual circumstances considered to date have produced the same outcome.
  • Also the circumstance that this has been the uniform result does not mean that ‘the long-established principle that discharge of a contract by breach does not mean that rights which have been unconditionally acquired are lost’ as per the decision in McDonald [1933] HCA 25; (1933) 48 CLR 457, 476 (Dixon J) no longer holds, noting that it was the fact that some contractual provisions have been held to survive termination e.g. an arbitration clause: Heyman v Darwins Ltd [1942] AC 356.

 

Time will tell whether an application to the High Court for special leave to appeal will be made.

Bartlett Workplace provides expert advice and representation in relation to all aspects of employment contracts, including post termination restraint provisions. If you have any concerns about your existing contractual arrangements, or if you need help in relation to a dispute about those arrangements, please contact either:

Glen Bartlett, Principal 

Tel: (03) 9603 5001

Bryan Mueller, Director of Litigation

Tel: (03) 9603 5002

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

 

 

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