Restraint of trade – consider the consideration

Restraint of trade – consider the consideration
Thursday November 19, 2015

It is an unspoken truth that an employee can be at the same time an employer’s biggest asset and greatest potential threat. This is particularly true in the recent Employment Relations Authority decision of Nova Energy Ltd v Mitchell.

Michael Mitchell was a former employee of Auckland Gas Company, a subsidiary of Todd Energy, before it amalgamated with Nova in 2013. Mr. Mitchell worked for Auckland Gas for a total of nine years before he decided to leave the company, however before he quit he uploaded Nova's client list and rates, described as a "kit book" to set up a gas brokerage, onto a USB drive. He kept that information once his employment ended. He then went on to set up a competing business, National Energy Limited, and used the information from Nova to identify certain Nova customers, particularly those paying high margins, without a recent contract or near the end of their contract.

Consequently, Nova Energy asserted that Mitchell had breached his duty of fidelity, good faith and the restraint of trade clause pursuant to his exit agreement. In the employment law context, restraints of trade are specific clauses in employment agreements under which employees agree not to do something that they would otherwise be free to do after they leave their job, such as running a similar or competitive business. Whilst no restraint of trade clause was included in his original employment agreement, Nova believed that Mr Mitchell was subject to a valid and enforceable restraint of trade that he agreed to from the last day of his employment.

However the Authority found that because this was a variation to Mitchell’s existing terms of employment; fresh consideration (a benefit conferred to Mr. Mitchell) was required for the new restraint term to be valid and enforceable. Nevertheless, that was not fatal to the Nova because a contract of employment cannot be equated with an ordinary commercial contract.  It is a special relationship under which workers and employers have mutual obligations of confidence,

Nevertheless, that was not fatal to the Nova because a contract of employment cannot be equated with an ordinary commercial contract.  It is a special relationship under which workers and employers have mutual obligations of confidence, trust and fair dealing. Thus in the absence of any post termination restrictions, Nova brought claims against Mr. Mitchell for breach of the common law duties of good faith and fidelity that that are implicit in any employment agreement in New Zealand. The duty of good faith in section 4 of the Employment Relations Act 2000 requires employers and employees to deal with each other in good faith and not to "whether directly or indirectly, do anything … to mislead or deceive each other".

Mitchell subsequently admitted he had breached obligations in his employment agreement and the implied common law duties, by taking Nova’s confidential information before his employment ended and then using it for the benefit of himself. Consequently, the Employment Relations Authority has ordered Michael Mitchell to pay Nova Energy annual damages over $1 million for a period of seven years. This case provides a useful reminder of how implied terms can be used to protect an employer’s business, especially where employees are engaged in

 

By Chris Patterson