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Sunday, October 2, 2011

Case Analysis of Woolworths v. Olson [2004] NSWCA 372

I.          All persons have the right to carry on their trade freely and without interference.  However, it has been a standard practice for employers to include stipulations in the contract of employment restricting the right of trade.  Restraint of trade is simply the activity that obstructs, limits, or eliminates the market competition (Kimberly Hendrikson, 2003).  The employers include this provision in the contract of employment in order to protect its interest by ensuring that the knowledge its employees have gained in the course of the performance of their duties is not used to the prejudice of the company (Jessica Paten, 2007).  It must however be stressed that in the absence of a contractual restraint on the employee, he is generally allowed after the termination of his contract to solicit employment in any company whether the same is in direct competition of his former employer (Arthur Moses, 2004)

While the right of the employer to provide for contractual restrictions in restraint of trade is recognized, it can be invalidated and rendered by the courts.  As a matter of fact, the courts have generally adopted a “stricter and less favorable view of the employee restraints compared with similar restraints in commercial arrangements” (Richard Ottley 2008, p.2).  Thus, when the employer inserts a provision in the contract of employment providing for a restraint of trade it is incumbent on the part of the employer to prove that the provision is reasonable.  Otherwise, the courts will invalidate it.

The question now is when is a provision on restraint of trade reasonable? What is it sustained by the courts and when is it invalidated and rendered void.  There is no hard and fast rule in determining whether contractual restriction on trade is valid or not.  It will have to depend on the special circumstances of the case.  Suffice it to say that Section 4 of the Restraint of Trade Act of 1976 provides that “A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not” (Section 4, Restraint of Trade Act of 1976). This means that to be upheld by the courts, employers need to establish that the restriction is not contrary to public policy.  On the other hand, by law, the employees have in the past invoked, section 106 of the Industrial Relations Act of 1996 which gives the Commission the power to declare contracts void, to wit:

“The Commission may make an order declaring wholly or partly void, or varying, any contract whereby a person performs work in any industry if the Commission finds that the contract is an unfair contract.” (Section, 106, Industrial Relations Act of 1996)

This essay seeks to analyze the court decision in the case of Woolworths Ltd v Olson [2004] NSWCA 372.  Specifically, I am to show how the employer in this has used the provision under the Restraint of Trade Act of 1976 to enforce the restraint of trade provision in the contract of employment and how the employees used the provision under the Industrial Relations Act of 1996 to seek for the nullity of the restraint of trade provision.

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II.         Mr. Olson has been as an employee at the Woolworths since 1985.  In 1994, he was promoted to a managerial position.  In 2003, as an executive of Woolworths he became a key member of a team responsible for developing a cutting edge software project called the “Project Mercury.  The team was developing a software system designed to transform Woolworths’ product supply chain procedures.  On July 2, 2004, however, he entered into negotiations with Franklins, a competitor of Woolworths in the supermarket industry.  On the same date, he also emailed highly confidential and valuable Project Mercury documents to his wife’s email address.  Subsequently on July 5, 2004, he gave notice of his resignation to Woolworths to take effect on August 2, 2004.   He signed a contract of employment with Franklins on July 7.  When his computer was checked by the company, they found out that Olson made several emails to his wife with the Project Mercury documents as attachments.  On July 12, Olson was dismissed from employment for breach of his contractual and fiduciary relations.  After dismissing him from employment, Woolworths also sought to invoke clause 10 of the employment contract for the purpose of restraining Olson for a period of six months from working for any other supermarket business which is in competition with Woolworths in Australia and New Zealand but provided him payment equivalent to his monthly remuneration for a period of six months.  Woolworths then asked that this contractual stipulation be enforced.  

The main issue in this case is whether the provision on the contract of employment in restraint of trade is reasonable and not contrary to public policy.

III.       In issuing an order that the respondent can be restrained directly or indirectly whether alone or otherwise and whether as an employee from being involved or concerned with Franklins and any other supermarket with which Woolworths is in direct competition until January 12, 2005, the Court of Appeals relied on the provision of section 4 of the Restraints of Trade Act of 1974 which allows the Court to protect public policy interest by ensuring that a contractual stipulation in restraint of trade is only enforced to the extent that it is reasonable.  According to the court the injunction sought by Woolworths is reasonable and not contrary to public policy based on two grounds: 1) it seeks to protect a legitimate and protectable interest which is the confidentiality of the Project Mercury the value of which may be affected when its direct competitors have this in their possession; and 2) it does not unduly prevent Olson from earning his living during the entire period until January 2005 since he received a restraint payment for the period of time that he was enjoined from accepting any employment with a company with which Woolworths was in direct competition.

IV.       The rationale for the court’s decision is the contractual restriction on trade is not absolute and does not seek to contravene any public policy.  It is limited in the sense that Olson is not allowed to be involved with a company which is in direct competition with Woolworths and it is further limited to Australia and New Zealand.  This means that Olson can still engage in employment in other industry such as the manufacturing business, retail business and other businesses.  If, on the other hand, Olson seeks to accept a company involved in similar business as Woolworths he can do so provide it operates outside of New Zealand and Australia.  Moreover, it is not as if Woolworths actually denied him his opportunity to earn a living as he was given a payment equal to his monthly wage in exchange for the contractual stipulation.

V.        It follows that employees should not take advantage of the trust and confidence repose upon them by their employers.  In the course of the employment, they come into possession of confidential information which is vital to the entire operation of the business which the company will seek to protect.  The importance of this information is further complicated by the need for employing highly skilled and experienced employees who often undergo training at the expense of the company (Michael Pickering, 2006).  They cannot in the guise of protecting their right to employment abuse this right.  They cannot simply while in the possession of confidential documents leave their employers and accept a position in a competitive business and use what they have learned from the previous employers for the benefit of their new employers.  Such is prejudicial to the property rights of the employers.  It is for this reason that contractual stipulations in restraint of trade and protected by law.  They are not necessarily unreasonable and contrary to public policy.  The employer can enforce this stipulation in court.

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