The Fuel Espresso case rises again

The most recent issue of NZLawyer contains an article by Blair Scotland and Kelly Scott on overpayments to employees.  In it they quote Hammond J’s remark in Fuel Espresso Ltd v Hsieh [2007] 2 NZLR 651 at [21] that “Agreements are made to be kept.”  This remark seems to have assumed considerable importance in the legal community and is treated as if it indicates a major change not only in the law of restraint of trade but on employment contracts as a whole.  How it has assumed this importance is difficult to understand.  First Fuel Espresso was an interim injunction case heard on 8 March with a decision delivered the next day.  The legal reasoning in the case, to be charitable, is brief and on the question of the reasonableness of restraint clauses largely non-existent.  Indeed the whole issue of reasonableness occupies only two paragraphs as follows.

The balance of convenience

[21] It is very difficult to see how this case can be, as the Judge saw it to be: a “finely balanced” one. The restraint is plainly reasonable. Agreements are made to be kept. Mr Hsieh was employed and trained, but then left in face of a clear contractual provision preventing him from doing what he has done. In the absence of an interim injunction, any relief to Fuel will, in the time-honoured phrase, be nugatory. This is a clear case for an interlocutory injunction.  

[22] It may be that on other, and much more extreme facts, a low salary set against a harsh restraint would be relevant to the exercise of the Court’s discretion, but that sort of fact-pattern does not arise in this case.

On the very particular facts of the case in front of the Court the balance of convenience decision may have been justifiable although the facts are not entirely clear.  Nevertheless it does seem that Mr Hsieh had set up a coffee cart and was attracting some Fuel customers.

However let us put this to one side and concentrate on whether one sentence in a one paragraph statement that fails to discuss, or arguably even appreciate, the basic principles of the relevant law should be regarded as heralding a major change in important areas of employment law and restraint of trade in particular.  What is wrong with this argument is the fundamental error that validity of a restraint clause is determined on the basis that “agreements are made to be kept.”  The correct position is stated clearly by Gault J in  Gallagher Group Ltd v Walley [1999] ERNZ 490 at [20] where, after having noted that the employee had “no complaint .. of the duration of the restrictions to which he had agreed voluntarily” stated:

But all this rather misses the point. Covenants restricting the activities of employees after termination of their employment are, as a matter of legal policy, regarded as unenforceable unless they can be justified as reasonably necessary to protect proprietary interests of the former employer and in the public interest: Mason v Provident Clothing & Supply Co Ltd [1913] AC 724, 733.

In other words agreement is irrelevant-the question is whether as a matter of law a restraint is reasonable, the point seemingly overlooked by Hammond J.  What is clear is that if well-established legal principles had been applied some aspects of the restraint might have been upheld to protect customer connection but this would have required modification of the relevant clause to operations within a reasonable radius of where Mr Hsieh actually worked prior to his resignation.  The clause as written went well beyond this and read:

As a Barista you will have access to how the Employer runs the business and  provides a competitive product. In order to protect the business you may not for three months following the termination of your employment:

Work in a competing espresso bar/café or coffee company within a100 metre radius of an [sic] Fuel operation; and/or

Set up a similar competing business within a 5-kilometre radius of an existing Fuel operation.

This restraint of trade shall apply to all of New Zealand and continue for three months from your last day of duty. You agree that this restraint is reasonable and necessary to protect the Fuel’s business interests.

Mr Hsieh was a barista-he made coffee!  Like probably several hundred other employees in Wellington let alone New Zealand.  Mr Hsieh may well have made very good coffee and have been well trained. But on what possible basis could this justify a prohibition of his working as a barista in much of Wellington, let alone New Zealand!  Apart from a very limited customer connection Fuel Espresso had no conceivable proprietary interest that justified such a restraint. Hammond J’s comment that Mr Hsieh was “was employed and trained,” by Fuel does not demonstrate such an interest.  Training costs may be able to be recovered in some cases but the provision of training does not justify a restraint-a restraint cannot be used to protect an employer from mere competition by a former employee.

This week I began teaching first year law students case analysis and precedent-this case might be mentioned but it will not be as an exemplar of either judicial reasoning or of the doctrine of precedent.