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Restraint of Trade in Settlement Deeds and Employment Contracts

The NSW Court of Appeal addressed important issues related to restraint of trade clauses in the recent case Creak v Ford Motor Company of Australia Ltd [2023] NSWCA 217. The decision provides valuable insights for enforcing non-compete and restraint of trade clauses, especially in settlement agreements.

Case Background

Michael Creak, who ran an authorised Ford dealership, continued selling modified “Raptorised” Ford vehicles after Ford terminated his dealership agreement. He used a different company to sell these vehicles, misleading customers into believing his dealership was still authorised. Ford sued for misleading conduct and passing off. The parties settled, and Creak agreed not to sell vehicles under the “Ford” brand or use the “Raptor” trademark. Despite this, he breached the settlement, prompting Ford to enforce the restraint.

Key Findings on Restraint Clauses

The Court confirmed that restraint of trade clauses in settlement deeds are subject to the same rules as those in other agreements. This holds even if the original litigation didn’t involve a restraint of trade. Restraints in settlement agreements must be reasonable and necessary to protect legitimate business interests.

Application of Findings:

  • Employee Termination: When a settlement deed includes a non-compete clause after an employee leaves, the clause must be reasonable in scope and duration to be enforceable. It should not unduly restrict the employee’s future job opportunities.
  • Business Disputes: Restraints in settlement agreements resolving disputes among business partners or shareholders must clearly protect business interests, such as trade secrets or client relationships, without being excessively broad.

Evaluating Restraints for Enforceability

To determine if a restraint of trade clause in a settlement deed or employment contract is enforceable, consider these questions:

  1. Is the Scope and Duration Reasonable?
    • Example: A restraint should cover only the necessary geographical area and a reasonable time frame to protect the business interest.
  2. Does the Restraint Protect Legitimate Interests?
    • Example: It should aim to protect specific business interests like trade secrets, client relationships, or confidential information.
  3. Are Restricted Activities Clearly Defined?
    • Example: The clause should clearly outline prohibited activities, avoiding vague or general descriptions.
  4. Can the Clause Be “Read Down”?
    • Example: Courts can modify overly broad clauses to make them reasonable while upholding their intent.

Definition of “Read Down”

“Read down” means a court interprets a legal provision more narrowly to ensure its enforceability. For restraint clauses, this involves adjusting the scope to align with legal standards, making the clause enforceable while preserving its purpose.

Practical Scenarios

  • Marketing Firm Example: In a settlement, a marketing firm restricts an ex-employee from contacting clients for six months. The Court’s decision supports such restraints if they are reasonable and necessary to protect the firm’s client base.
  • Tech Company Example: A tech company’s settlement deed prevents a former employee from using proprietary code. This restraint is enforceable if it reasonably protects the company’s intellectual property without being overly broad.

Conclusion:

The Creak v Ford Motor Company of Australia Ltd case provides crucial guidance for drafting and enforcing restraint of trade clauses in settlement agreements. These clauses must be reasonable, clearly defined, and aligned with protecting legitimate business interests to be enforceable.

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