The doctrine of severance in restraints of trade
In I F Asia Pacific Pty Ltd v Galbally, Dodds-Streeton J stated:
The plaintiff bears the onus of establishing that severance is appropriate. The evidence it has adduced is, in my view, insufficient to justify severance even on the more liberal approach reflected in Business Seating (Renovations) v Broad, which is distinguishable. The stricter approach, in any event, cautions against curial disentanglement of unreasonably wide clauses, recognising that they may act in terrorem by exposing employees to the threat of litigation. Undue judicial readiness to save such clauses by severance reduces the sanction of invalidity otherwise applicable to employers who attempt to impose unjustifiably wide restraints.
65 In Wallis Nominees (Computing) Pty Ltd v Pickett, Redlich JA stated:
Further, the courts have strictly circumscribed the circumstances in which severance should be undertaken in the context of employee restraint covenants. This stricter approach, as Dodds-Streeton J observed in I F Asia Pacific Pty Ltd v Galbally, cautions against curial disentanglement of unreasonably wide clauses, recognising that they may act in terrorem by exposing employees to the threat of litigation. A too ready judicial willingness to save such clauses by severance would, as her Honour rightly observed, also reduce the sanction of invalidity otherwise applicable to employers who attempt to impose unjustifiably wide restraints. Where an employer has sought to burden its employee with a patently unjustifiable restraint, there should be a marked reluctance by the courts to allow the employer a belated revision of the condition, only when it has become apparent that the condition is likely to be struck down because of its unreasonable reach. This was such a case.
Redlich JA’s reference to ‘a patently unjustifiable restraint’ is apt to describe the operation of the second limb by reference to the 50 brands/entities in Annexure A.
66 The reasonableness of the Annexure A restraint falls to be determined, not by reference to the circumstances of the alleged breach, but by reference to the operation of the restraint as at 7 December 2015. The plaintiff mounted a substantial case in support of its contention that there is fierce competition between JGL and Cotton On. It led a considerable volume of evidence regarding the operations of Smiggle and the commercially sensitive information in respect of Smiggle which Ms Peck was exposed to during her employment. JGL submitted that this evidence supported a finding that the restraints in her contract are reasonable and enforceable.
67 JGL’s focus on the level of competition between it and Cotton On Group invites the obvious question as to what is the level of competition between it and the other 49 brands/entities in Annexure A. JGL conducted its case by focusing very heavily upon the circumstances of the alleged breach; ie Ms Peck’s proposed employment with Cotton On. If the current proceedings were subject to the Restraints of Trade Act 1976 (NSW), JGL could validly contend that the reasonableness of the restraint should be assessed by reference to Ms Peck’s proposed employment with Cotton On.
68 Section 4 of the Restraints of Trade Act 1976 (NSW) provides:
(1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not.
(2) Subsection (1) does not affect the invalidity of a restraint of trade by reason of any matter other than public policy.
(3) Where, on application by a person subject to the restraint, it appears to the Supreme Court that a restraint of trade is, as regards its application to the applicant, against public policy to any extent by reason of, or party by reason of, manifest failure by a person who created or joined in creating the restraint to attempt to make restraint a reasonable restraint, the Court, having regard to the circumstances in which the restraint was created, may, on such terms as the Court thinks fit, order that the restraint be, as regards it application to the applicant, altogether invalid or valid to such extent only (not exceeding the extent to which the restraint is not against public policy) as the Court thinks fit and any such order shall, notwithstanding sub-section (1), have effect on and from such date (not being a date earlier than the date on which the order was made) as is specified in the order.
69 In Woolworths Ltd v Olson, the New South Wales Court of Appeal stated in respect of s 4:
First, the court determines whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed. Next, the court determines whether the restraint, so far as it applies to that breach, is against public policy. If it is not, the restraint is valid, subject to any order which may be made under s 4(3).
70 In applying s 4(1), the court concentrates on the actual breach, rather than hypothetical breaches that might apply if the restraint were given its widest effect:
In applying s 4(1) the court should consider the circumstances of the particular case before it and determine the validity of the restraint to the extent that it purports to operate in those circumstances, and it is unnecessary to consider its purported operation in other conceivable sets of circumstances… the enactment of s 4(1) has succeeded in requiring attention to be concentrated on “the actual breach” rather than “imaginary breaches” for the purpose of determining validity of a restraint.
71 Section 4(1):
allows the court to ignore the fact that the restraint goes beyond what is reasonable, provided the restraint can be enforced to an extent that is reasonable. The subsection permits the court to enforce a covenant whose provision is overextensive as regards area, time or extent.
It gives the Court capacity ‘to enforce just and reasonable covenants which may on their face be too widely expressed’. In other words, it may permit the enforcement of a covenant which might otherwise be void by operation of the common law doctrine, if its particular application on the facts is reasonable.
72 In Victoria, the common law principles governing restraint of trade are not qualified by legislation. Contrary to the position under s 4 of the Restraints of Trade Act 1976 (NSW), a Victorian court cannot ignore the fact that a restraint goes beyond that which is reasonable. The assessment of the reasonableness of a restraint is in accordance with the statements of principle of Barwick CJ in Geraghty and Gummow J in Adamson. Putting to one side improbable contingencies not within the contemplation of the contracting parties, the reasonableness of the restraint is to be assessed by reference to what the restraint, properly construed, requires or permits. That assessment is to be undertaken by reference to the position when the contract was entered into. As at 7 December 2015, Cotton On was one of 50 brands/ entities listed in Annexure A. The reasonableness of the restraint created by the second limb is assessed by reference to all 50 brands/entities.
73 I accept that evidence of competition between Cotton On and JGL is relevant insofar as it sheds light on JGL’s legitimate interest in protecting its confidential information. Ultimately that evidence is of limited value because the contract spells out in very strong terms JGL’s legitimate interest in protecting its confidential information. Further, the evidence of competition between JGL and Cotton On is, at best, of marginal relevance to the assessment of the reasonableness of the restraint created by the second limb. This is because Cotton On is but one of 50 listed entities/brands in respect of which the second limb operated.
74 JGL acknowledged that ‘the vast majority’ of its evidence on competition was directed specifically between JGL and Cotton On. JGL submitted that:
7. The vast majority of the Just Group’s evidence on competition was directed specifically to competition between the Just Group and Cotton On. This is because:
a. Ms Peck proposes to start working for Cotton On and not some other brand listed in Annexure A;
b. discretion to refuse an injunction was a live issue until Ms Peck abandoned it at the very end of her opening; and
c. the Just Group submits that, for the reasons set out below, Annexure A is severable.
8. The Remaining Issues Submission will analyse this evidence of competition between the Just Group and Cotton On to show that, together with other factors, it justifies a broad and long restraint with respect to Cotton On.
9. As for the other 49 items, the following evidence shows that their inclusion in Annexure A is also reasonable because each of them competes with the Just Group.
10. Mr McInnes gave the following evidence about the list in Annexure A:
i. In his affidavit, he deposed:
The list is a listing of brands or companies from whom I considered it vital to keep JGL’s confidential information so that they could not benefit at our expense in terms of their product range, sourcing, retail space and future investment strategies. I reviewed Annexure A before sending Peck the employment agreement and was satisfied that the listing was appropriate given the CFO role and the nature of the information to which the CFO would be exposed.
b. In his oral evidence, Mr McInnes further explained that each item in Annexure A is a “compe
Just Group Limited v Peck (2016) VSC 614 delivered 17 October 2016 per McDonald J