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.
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