Lawyers beware; restraint of trade clauses must be very carefully drafted

Several days ago, I wrote about the issue of restraints of trade in employment law, and in that post begged the question “will a post employment restraint of trade in a contract imposed upon an employee survive and be enforceable if there is a breach of the agreement by the employer? For example, what is the situation where the conduct of an employer is so unacceptable that it constitutes a repudiation of the employment contract (for example a constructive dismissal) contract which contains a post employment restraint of trade?

The answer appears to be that as a general rule an innocent employee in that situation may very well be freed from the restraint or restraints unless the contract is worded so that it is intended to survive the employer’s breach.

Although the case is about the enforceability of restraints of trade in the context of a business sale rather than an employment relationship, Justice Blue sitting as a member of a Full Court of the Supreme Court of South Australia wrote

“The general rule is that termination of a contract discharges both parties from the obligation to further perform duties otherwise required to be performed. The general rule applies regardless of whether the termination is due to default by one party – and regardless of whose default led to the termination – or without fault by either party (such as under an express right to terminate upon notice). Termination is to be contrasted with rescission for matters vitiating formation of the contract which operates retrospectively to discharge with effect from the time of formation all duties required to be performed. Termination only has prospective operation.
In McDonald v Dennys Lascelles, Starke J said:
The rescission of the contract, however, did not operate to extinguish it ab initio, but in futuro, so as to discharge obligations under it unperformed.
Dixon J (with whom Rich and McTiernan JJ agreed) said:
When a party to a simple contract upon a breach by the other contracting party of a condition of the contract elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from partial execution of the contract and causes of action which had accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract which is not void or voidable at law or liable to be set aside in equity is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only, and the party in default is liable for damages for its breach.
The general rule is the subject of at least three corollaries or qualifications. First, rights that at termination have accrued unconditionally to a party and obligations that at termination have become unconditionally required to be performed by a party, including rights to payment of a debt or damages, are not divested or discharged and can be enforced notwithstanding termination. Secondly, when termination is due to default by one party – termination for breach of an essential term or a sufficiently serious breach of an intermediate term or repudiation – the innocent party is entitled to damages for the net value of further performance of the contract: usually called “loss of bargain damages”. Thirdly, obligations required to be performed in future survive termination if on its proper construction such obligations are intended to survive termination of the contract, ie performance is not contingent on its subsistence or future events dependent on its subsistence or future obligations discharged by its termination.
There is a relationship between the third qualification and the dependent or independent nature of obligations required to be performed during subsistence of the contract. Some obligations to be performed by one party are dependent (or “conditional”) upon performance by the other party of another obligation under the contract; some obligations are interdependent (or “mutual”, “reciprocal” or “concurrent”); and some obligations are independent. Whether an obligation is dependent, interdependent or independent is to be determined as a matter of construction of the contract. If an obligation of one party is dependent on performance of another obligation by the other party, if the first obligation is sought to be enforced after termination but the performance of the second obligation is discharged by the termination, ordinarily the first obligation will not survive termination. Conversely, if an obligation of one party is independent of performance of another obligation by the other party, if the first obligation is sought to be enforced after termination but the performance of the second obligation is discharged by the termination, ordinarily the survival of the first obligation will be independent of survival of the other obligation.
The general rule and the corollaries and qualifications identified above can be expressed as a single rule: termination of a contract discharges those obligations of a party that are not contingent upon its subsistence or future events dependent on its subsistence or future obligations discharged by its termination. Whether an obligation is or is not contingent in this sense is to be determined as a matter of construction of the contract………………

Mr Richmond contends that General Billposting Company Limited v Atkinson is authority for the proposition that it is a rule of law that a party who has repudiated a contract leading to its termination by the innocent party can never enforce a restraint clause expressed to operate after termination and this was endorsed by the High Court in Kaufman v McGillicuddy. Mr Richmond’s contention should be rejected because the question whether the restraint clause survives must depend on the proper construction of the contract. This was the approach adopted by the Court of Appeal in Measures v Measures Brothers Ltdwhich was cited with approval by the High Court in Kaufman v McGillicuddy and by Gibbs J, with whom Aickin J agreed, and Stephen J in Geraghty v Minter. To the extent that Lord Collins’ judgment in General Billposting Company Limited v Atkinson might be read as suggesting that there is a rule of law regardless of the parties’ intention as manifested in the contract that restraint clauses cannot survive termination for repudiation by the party in whose favour they operate, this might be explained by the fact that in 1909 the common law had not yet been clarified that termination for repudiation does not operate by way of rescission ab initio.”

Now in my opinion, restraints of trade which form part of commercial contractual arrangements are more likely to be upheld than those which are found in employment contracts, but nevertheless the above principles are applicable to the employment context too.
Richmond v Moore Stephens Adelaide Pty Ltd (2015) SASCFC 147 delivered 29 September 2015