Restraint of trade clauses in contracts have long been a subject of legal scrutiny, raising questions about their enforceability and the delicate balance between protecting a company's interests and an individual's right to work freely.
A recent decision by the New Zealand High Court, Redcoats Limited v Day  NZHC 1037, provides valuable insights into the complex issues surrounding the enforceability of such clauses. Lets explore the key aspects of the case and shed light on the principles governing the enforceability of restraint of trade clauses.
In the case of Redcoats Limited v Day, the plaintiff, Redcoats Limited (Redcoats), a real estate agency operating in Wellington and Lower Hutt, sought an injunction against Mr. Day, a former salesperson, and his intended employer, Andco Realty Ltd (Andco). The injunction aimed to restrain Mr. Day from engaging in any private business or employment that competes with Redcoats within a 15-kilometer radius for three months. Andco was also restrained from employing Mr. Day in any capacity that would compete with Redcoats under the same restrictions.
The central issue in this case revolved around the enforceability of the restraint of trade clause in Mr. Day’s contract for services with Redcoats. The court considered whether the restraint of trade clause was reasonable and necessary to protect a legitimate proprietary interest held by Redcoats.
Legitimate Proprietary Interest
The court recognised that a restraint of trade clause is prima facie void as it is considered contrary to public policy. However, if the party seeking enforcement can demonstrate a legitimate proprietary interest that needs protection, the restraint may be upheld. In this case, Redcoats argued that the clause was meant to protect its goodwill, market presence, and branding within the Wellington region.
Good Will and Proprietary Interest
The court found that Mr. Day’s status as a shareholder in a related company, Wellington City & Suburbs Realty Ltd, which operated on behalf of Redcoats, indicated a proprietary interest in Redcoats’ brand and business. This aspect reinforced the notion that Mr. Day had acquired a valuable interest tied to Redcoats’ business, further justifying the restraint of trade clause.
Balance of Convenience
The court considered the balance of convenience in determining whether to uphold the restraining orders. It was noted that Mr. Day had made plans to immediately work for Andco in a competing capacity with Redcoats, effectively disregarding the restraint clause and changing the branding of his office. The court deemed this action as Mr. Day creating his own inconvenience, which weighed against his favor. Additionally, the court concluded that damages would not be an adequate remedy in this case, given the complexity of assessing damages due to overlapping client relationships
Despite allegations of aggressive communication between Mr. Day and Redcoats, the court concluded that the overall justice of the case favored Redcoats. The fact that Mr. Day intended to start a competing venture promptly after leaving Redcoats and was prepared to ignore the restraint of trade clause worked against his position.
This case illustrates the factors the court must consider when evaluating the enforceability of restraint of trade clauses. To enforce them you must be able to establish a legitimate proprietary interest, that the balance of convenience and overall justice favours an injunction if you want urgent relief.