Restraint Clauses and Non Compete Agreements

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** See also Breaches of Restraint of Trade Clauses.

The recent case of Habitat1 Pty Ltd v Formby [No 2] [2017] WASC 331, has provided great insight into how the law operates in relation to restraint of trade clauses. 

Christian Formby and Geoffrey Pritchard were co-owners of an interior design and construction firm Habitat1, each with a 50% stake in the company. Mr Formby was a founder of the company and in 2013, Mr Formby signed a non-compete agreement which contained several restraint clauses. In February 2016, Mr Formby left the business, ceasing to be an employee of Habitat1. 

During Mr Formby’s employment at Habitat1, it was alleged that Mr Formby made false and damaging allegations about Mr Pritchard to staff and customers. Six months before leaving Habitat1, Mr Formby set up a competing business called Hawk Crest. At the time, Mr Formby was not a director of Hawk Crest however he has admitted that he had always been the ‘deciding mind’. Mr Formby had also deleted all his company emails after his departure from Habitat1. Collectively, this conduct was considered to be a breach of Mr Formby’s contractual duties to the company as these actions were not in the best interests of Habitat1. 

The restraint clauses within the non-compete agreement restrained Mr Formby from competing by way of engaging in a business the same or substantially the same as the business or soliciting customers during a given period of time and geographical area. 

The Court found that Mr Formby was bound by the restraint covenants and that he had breached some of the terms. The Court upheld the restraint period of 12 months from the time of Mr Formby’s departure from the business in Perth and Melbourne. The Court stated that the restraint clause was reasonable and necessary to protect the goodwill and value of Habitat1, as it protected the company’s confidential information, legitimate interests and customer connections. It was also mentioned, that due to the senior role that Mr Formby had, his knowledge and expertise were factors supporting the need to enforce the restraint clauses.

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