Restraints of Trade - Employment Lawyer Auckland - Contract Lawyer Auckland - Dukesons Business Law Update

July 2016

This update isn't legal advice - if you want legal advice on any employment law issue or any other business law issue, please contact me. I'm an employment lawyer in Auckland who deals with a wide range of business law or commercial law issues.

There was an article in the NZ Herald a short time ago about an ex director and two ex employees allegedly setting up in opposition to a company, while they were still involved in the company's business. For some reason, none had agreed to restraints of trade. The ex director and ex employees are defending the allegations. Employment lawyers, contract lawyers, and company lawyers would regard these issues seem to be becoming more common.

The article serves as a reminder that the damage to a business could be potentially catastrophic where ex directors and/or ex employees, who have confidential information and insider knowledge, set up in opposition . Businesses should consult their employment lawyer or contract lawyer or company lawyer to ensure that they can rely on enforceable restraints.

While any employee who is presented with a restraint of trade clause in their employment agreement needs to consider it carefully before agreeing to it, an employer would be "mad" not to have key employees agree to reasonable restraints. Directors, especially executive directors, and should also be under restraints.

There have been several cases over recent years that business lawyers would be aware of where directors or employees have plotted, while still being involved in the business, to set up in competition and to take clients/customers. The offending bods have been held to account. In some of these cases, restraint provisions would have won the day.

If for some reason, there is no agreed restraint, directors and employees will still owe some duties to their companies/employers and could be held to account where they've broken these duties. But better if they have agreed to an effective restraint.

The rub is that it isn't always easy even for an employment lawyer or contract lawyer to advise on or draft a reasonable restraint. Every first year law student can recite the legal tests for what may be reasonable but commercial lawyers will tell you that actually determining this in the real world isn't anywhere near as easy. One thing that can be said with certainty is that there is no "one size fits all" when it comes to restraints in relation to employees. Each restraint needs to be tailored to the particular employee or type of employee. While restraints for directors also need to be reasonable, they may be able to be more extensive than for employees.

It goes without saying that restraint issues are highly relevant to shareholder agreements, where the possibility of a shareholder exiting the company with insider knowledge and an intent to compete needs to be addressed. Again, restraints between shareholders may be able to be more extensive than restraints for employees.

Feel free to send a link to this Update to anyone who would be genuinely interested.

Please contact me if I can help you with any employment law issue or any business law or commercial law issue.

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