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Warburton’s Case – Some lessons for Employment Lawyers

Published on June 29, 2011

The decision of Justice Pembroke in Seven Network (Operations) Limited & Ors v James Warburton (No 2) [2011] NSWSC 386 is a very useful one for employment lawyers, dealing as it does with most of  the general principles of the common law concerning post employment covenants in employment contracts and providing an interesting example of the modern application of some general contractual principles in the context of senior executive employment.

Here is not the place to recount the facts (and the disputes over the facts). The judgment is easy to read and understand (thank you your Honour) so I recommend it to all practitioners in this area of specialty.

What does it tell us then that is important?

First, “cascading clauses” in Post Employment Covenants are not unenforceable just because they are complex (or even opaque, obscure or vague). The question is “whether there is such a lack of clarity that the clause is unworkable; that it cannot be given effect in a meaningful way.” Yes, we knew that from the Court of Appeal decision in Hanna v OAMPS, but the principle is very succinctly put by his Honour. So, Cascading clauses can be used provided that they are understandable (and make sense) as separate independent obligations. I would comment however that in practice, the more complex they are the more likely that they will become unworkable or meaningless. Hence the lawyer who gets carried away with setting up a clause that ends up as a linguistic crown of thorns will find that the result of his or her desire for “covering everything” is that nothing is enforceable.

Second, the fact that a Restraint of trade clause is not in an employment contract but in some other ancillary instrument (eg a Deed relating to management incentives) does not, of itself, inhibit enforceability. Clearly this must be so, but this decision buries any contrary contention. However, it was clear that Mr Warburton was well aware of the existence of the restraint in that Deed and realised where it was there. That’s important to enforceability.

Third, a factor in determining whether a Post Employment Covenant is reasonable (at least when it is entered into) is whether the employee has had the clause explained to him by the employer and has obtained his or her own legal advice on it before agreeing to it. This seems logical but also a bit unfair because it means that the employee might be better off NOT getting advice about the clause. Thus employers who really believe they have valuable business they want to protect from the skilful employee ought now (if they have not already) think seriously about paying for the employee to get legal advice on the contract (and in particular the Post Employment Covenants) before allowing the employee to sign up to the contract. But of course that will only protect the reasonableness of the restraint at the time it is made – it will be another question whether it is still reasonable at the time later on that the employer seeks to enforce it.

Fourth, if a Post Employment Covenant is reasonable at commencement nevertheless the Court can tailor the injunction it grants at the time of relevant events later to only enforce the covenant to the extent it is reasonable at that later time. While his Honour seemed to hold some reservations about the true effect and reach of the Restraint of Trade Act 1976 (NSW) I think this much can be said. Where a restraint is reasonable at inception but becomes unreasonable later, it can be enforced later by an injunction limited to the period that is reasonable (in the Warburton case that was in effect 10 months when at inception the restraint period was 12 months); but if the restraint was unreasonable to start with no injunction based on equitable principles can be granted later – such an injunction would have to rely on the power in the Restraint of Trade Act. An important distinction, particularly as the Act is only applicable to New South Wales, not other Australian jurisdictions.

As to the contractual principles in the context of modern senior executive employment, a few short points are worthy of note. 

Sending an employee on “gardening leave” when he announces he/she is resigning to join a competitor is not a repudiation of the employment contract by the employer – at least (as was the case in the Warburton case) where the contract allows for gardening leave. I suspect that his Honour was not averse to the idea even without express contractual stipulation, and I would observe that a shortish period of such leave would probably be permissible generally – however a lengthy period of gardening leave without specific contractual support would be much more problematical these days – see in that regard the obiter remarks of Gummow and Heydon JJ in Blackadder v Ramsey Butchering (20050 221 CLR 539 at [80], where the right of an employee to work and retain /enhance his/her skills was emphasised. Thus employers need to ensure that their contracts (like the one binding Mr Warburton) specifically allow for such leave.

And, finally, spontaneous or gratuitous comments by a supervisor at the time that an employee announces his resignation to join a competitor (eg “people are free to go anytime”) are unlikely to give rise to an estoppel preventing the employer enforcing its post employment covenant.

The judgment addresses some other issues but the matters mentioned above seem particularly interesting aspects.

Peter Punch

29 June 2011

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