Validity and Enforceability of the Restraint Clause

Bulldogs Rugby League Club Ltd & anor v Williams & ors gave the Court another opportunity to consider the principles of Restraints of Trade and review the right of employers to enforce employee restraints. The following case analysis will discuss the Court’s decision and its significance in the legal and commercial contexts.

Facts

Sonny Bill Williams (the first defendant) entered into a five-year contract with the Bulldogs Rugby League Club Ltd (the first plaintiff) which was due to commence on 1 November 2007 and entitled Williams to an annual salary of $400,000 per season [2] and remuneration. [3] By signing the contract, according to clause 3.1(t) of the contract, Williams “agreed to ‘not, without the prior written consent of the Club… participate in any football match of any code’, save for matches specified elsewhere in the contract”. [4]

However, the Bulldogs realised that Rugby Club Toulonnais SA, who was a public company in professional sports based in France and also the second defendant, had commenced negotiations with the first defendant from about June 2008 regarding the first defendant playing for it “in the 2008-2009 ‘Top 14’ competition in France”. [5] In newspaper reports, the first defendant was said to have signed a contract with the second defendant and also be due to represent the second defendant in a game on 8 August 2008. [6]

As a result, the Bulldogs brought litigation to seek, among other things, an injunction to enforce clause 3.1(t) of the contract which would restrain the first defendant from playing for the second defendant. [7]

Issues

In order to decide whether to grant the injunction, the court had to consider the validity and enforceability of the restraint clause. Accordingly, Austin J identified several questions that would need to be answered:

Did the alleged breach by the first plaintiff “infringe the terms of the restraint properly construed”? [8]

Did the restraint go any further than what was reasonably necessary to protect the legitimate interests of the person in whose favour the restraint was imposed? [9]

Was the contract between the first plaintiff and the first defendant for a provision of special services?

Ratio Decidendi

In determining the validity of the restraint, Austin J initially examined the general principle at common law that “a restraint of trade is contrary to public policy and void unless it is justified by the special circumstances of the particular case”. [10] In addition, as the contract between the first plaintiff and the second plaintiff was governed by New South Wales Law, Austin J also referred to the Restraints of Trade Act 1976 (NSW) s4(1) in which “a restraint is valid to the extent to which it is not against public policy, even if not in severable terms”. [11]

In evaluating the reasonableness of the restrain, Austin J followed the approach of Palmer J in Idameneo (No 123) Pty Ltd v Angel-Honnibal [12] relating to the consideration that the parties had freely negotiated on equal terms before signing the contract where “the particular restraint has been sought by one and given by the other” [13] . Moreover, the judge also applied the principle drawn from Doherty v Allman [14] that where there are no fraudulent, misleading or deceptive conduct or circumstances, “a considered obligation undertaken by contract should be enforced against the person who undertakes it”. [15] Besides, taking account of the distinction between covenants that operate only during the term of employment and covenants that extend beyond the termination of the employment period, Austin J adopted the observation of Crockett J of the Victorian Supreme Court in Buckenara v Hawthorn Football Club Ltd [16] that only in “very unusual” circumstances would a restraint that operates exclusively during the course of employment be found to be unreasonable. [17]

Furthermore, in determining the enforceability of the restraint clause, Austin J upheld the longstanding principle in Lumley v Wagner [18] which was then followed by the Court of Appeal of New South Wales in Curro v Beyond Productions Pty Ltd [19] that “if the contract is a contract for the provision of special services, the promise not to work for a competitor will be enforced”. [20]

Critical Analysis and Evaluation

Austin J categorised the relationship between the first plaintiff and the first defendant as one of “employer and employee”.

It was noted by the judge that the contract had been carried on by the first plaintiff as it had continued paying salary to the first defendant and the restraint clause was therefore still operative. [21]

Using the evidence and facts provided before Court, [22] Austin J subjectively argued that it was reasonable to apprehend that the first defendant intended to breach clause 3.1(t) of the contract by playing rugby for the second defendant. [23] Furthermore, it was also argued if the newspaper reports provided correct information on the signing of contract between the first defendant and the second defendant, it would be very likely that the first defendant intended to breach that provision of the contract. [24] As a result, this is consistent with the Restraints of Trade Act 1976 (NSW) s4(1) under which attention should be focused on the actual or apprehended breach, rather than on imaginary or potential breaches in determining the validity of a restraint. [25]

However, the central issue was whether the restraint went any further than was reasonably necessary to protect the legitimate interests of the employer. [26]

At common law, for a restraint to be reasonable, it must be reasonable in the interests of the privy parties and reasonable in relation to the interests of the public. [27] However, these two fronts are generally treated as one, which means that if the restraint is held to be reasonable in the interests of the parties, then it is also reasonable in the public interests. [28]

In evaluating the reasonableness of the restraint, Austin J acknowledged the evidence set out in the affidavit regarding the stated reasons for the restraint, which were:

To prevent injury to the player that will hinder him fulling his obligation under the contract;

The recruitment strategy of the first plaintiff, which was relied upon the first defendant’s availability to play for it in the National Rugby League competition; and

The “star attraction” value of the first defendant that was believed to contribute to the goodwill, patronage, membership subscriptions, pride, prestige and standing of the first plaintiff. [29]

Moreover, to support the reasonableness of the restraint, from clause 18.2(c) of the contract, Austin J particularly pointed out that as the first plaintiff was given opportunity to obtain independent legal and financial advice before signing the contract, there was a bargain “at arm’s length and on an equal footing”. [30] This observation of Austin J is justified and consistent with the case Curro v Beyond Productions where the relative bargaining position of the parties was regarded as a critical consideration when determining the reasonableness of a restraint. [31]

At the same time, the judge also took into account the simple idea of sanctity of contract which indicates that “a considered obligation undertaken by contract should be enforced against the person who undertakes it”. [32]

Besides, the facts of Bulldogs Rugby League Club Ltd were said to distinguish it from Aussie Home Loans Limited v X Inc Services [33] and Woolworths Limited v Olson [34] , where restrictive covenants in question operated only during the term of employment. Accordingly, Justice Austin held that the restraint, which in effect meant that while being employed by the Bulldogs but not after the contract had terminated, Williams could not work for another, was not unreasonable.

Based upon these considerations and despite the absence of restrictions on the geographical area and the range of football codes, Austin J held that the restraint clause did not extend further than reasonably necessary to protect the legitimate interests of the first plaintiff. [35]

Attention was then turned to the matter regarding the enforceability of the restraint clause. Austin J referred to the observation of Hodgson J in Australian Rugby Football League v Cross [36] that rugby league players could be regarded as tantamount to entertainers and therefore providing special services under their contracts. [37] Applying it to this case, Austin J was justified in finding that the contract was evidently for the provision of special services where “an elite rugby league player undertakes not to engage in another football code without the employer’s consent”. [38] Taking notice of this context, the judge followed the relevant principle [39] in Lumley v Wagner in drawing a conclusion that the restraint was enforceable.

Impact on subsequent cases

Although employees have often been able to avoid restraints of trade in their employment contracts when the clauses are unreasonably broad, e.g. in respect of geographical limitation, in this case, the restraint was still held reasonable and not uncertain as it was justified by the purpose of protecting legitimate interests of the employer and more importantly, it was no more than needed to provide that protection. This case is consistent with many other cases in relation to restraints in employment contracts and therefore can reinforce the restraint of trade doctrine and be used as authority for future similar cases, especially those relating to contracts for special services.

Implications

The case has validated the right of employers to enforce employee restraints [40] provided the restraint clauses are made to the particular situations and reasonable in all the circumstances. At the same time, employees who disregard reasonable restraints will receive little clemency from the Court. [41] Consequently, this may have an effect of promoting commercial certainty in reference to the enforceability of restraints of trade in employers’ favour.

Conclusion

The judgement of Austin J in this case was justified by the use of supportive evidence and a good application of relevant principles, approaches and the reasoning in a number of typical cases relating to the restraints of trade. The underlying principle is that a restraint clause must be reasonable to be enforceable. As a result, this may help heighten commercial parties’ cognisance of their rights and obligations in contractual relations and therefore, a well-balanced result seems to have been obtained by the Court.

Bibliography

Case Law

Australian Rugby Football League Ltd v Cross (unreported, Hodgson J, 27 February 1997)

Aussie Home Loans Limited v X Inc Services [2005] NSW SC 285

Bulldogs Rugby League Club Ltd & anor v Williams & ors [2008] NSWSC 822

Buckenara v Hawthorn Football Club Ltd [1988] VR 39

Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337

Doherty v Allman (1878) 3 App Cas 709

Fairfax Publications Pty Limited v Birt [2006] NSWSC 995

Idameneo (No 123) Pty Ltd v Angel-Honnibal [2002] NSWSC 1214

Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449

Lumley v Wagner (1852) 1 De GM&G 604; 42 ER 687

Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company [1894] AC 535

Woolworths Limited v Olson [2004] NSWCA 372