Court forces directors to quit new job over restraint

The New South Wales Supreme Court has acceded to an employer’s request that two former employees should be forced to resign from directorships of their new employer. The case demonstrates the broad powers which Courts may exercise to effect what it considers as a just outcome.

In Red Bull Australia Pty Ltd v Stacey, the Court was asked by Red Bull to restrain a former general manager and marketing manager from any involvement in a company which was a potential competitor in the energy drinks market. Both had become directors of the Australian company, Calidris, which was a subsidiary of a Singapore company and had been engaged in starting off the Calidris business in Australia. Red Bull sought the orders on the basis of post employment restraints which had been included in the employees’ contracts of employment.

The Court agreed with Red Bull’s argument that the only effective remedy to ensure the integrity of the restraint obligations was to force the former employees to resign as directors and to have no involvement with the business of Calidris until the end of their restraint periods.

Although the decision is only an interlocutory decision, with a full trial to follow, the case is interesting for a number of reasons:

• The Court was prepared to grant an injunction even though the restraint period was due to expire shortly. The Court decided that the employees could recover lost salary from Red Bull if they were ultimately successful in defending the case at trial;
• The employees had offered the Court a range of comprehensive undertakings that they would remove themselves from involvement in the business, but these were rejected by Red Bull.  They argued, and the Court agreed, that their positions as directors of Calidris meant they would be in a position where they would be unable to meet their directors duties if the restraint was enforced;
• The Court accepted the preliminary evidence that Caldiris was unlikely to be a major competitor of Red Bull;
• Both of the employees had been terminated by Red Bull and there appeared to be no suggestion that they had been planning to enter a competitive business while still employed by Red Bull. The injunction application wasn’t made until almost 12 months after the employees were given notice of termination;
• The employee and Red Bull had signed a deed of release which arguably overrode the restraints in the contract of employment.

The lessons for employers are:

• Restraints of trade can work, but bear in mind that both sides will be spending a lot of money on lawyers. The return for Red Bull may or may not ultimately be worthwhile if Caldiris is indeed only a small competitor;
• Courts have a broad discretion to “mould” orders to suit a particular situation and the order that employees resign as directors is a little unusual;
• If you enter a release agreement with employees, make it crystal clear what obligations will be ongoing.