To: Vince Vanilla
CC: Ike Ice
From: Del Funkee
Date: 17 March 2011
Subject: Bust-A-Move Break Dance Studio: Breach of Contract, Validity of Restraint of Trade Clause and Equitable Injunctive Relief
Matter No: ref: AA 369 BB
You asked me to prepare a legal opinion on the legal issues facing Big Mudd, also known as Christopher Watters, of Bust-A-Move Dance Studio.
Bust-A-Move Dance Studios seeks advice on:
1. Whether they can seek an injunction prohibiting a former employee, Mixmaster Meg, also known as Ms. Megan Sutherland, from breaching a restraint of trade clause in her contract by offering her services with a nearby competitor;
My advice is that:
Bust-A-Move may seek an injunction forbidding Ms. Sutherland from offering her services with a competing break dance studio, on the basis of breach of contract, as the clause in breach is a reasonable restraint; protects a recognized interest; not against public policy; and is both valid and enforceable.
FACTS
Bust-A-Move retains a number of break dance instructors on standard employment contracts. Clause 14 of the employment contract provides:
14. Restraint of Trade
(1) Upon leaving the employ of Bust-A-Move Break Dance Sudios, you agree not to work at another break dance studio within:
(a) 50 kilometers;
(b) 20 kilometers;
(c) 10 kilometers
of Bust-A-Move Break Dance Studios for the next:
(d) year;
(e) six months;
(f) three months
(2) Each restraint in this deed (resulting from any combination of the wording in (a)-(c) and (d)-(f)) constitutes a separate and independent provision, severable from the other restraints. If a court of competent jurisdiction decides any such restraint to be unenforceable in whole or in part, the enforceability of the remainder of the restraint and will not be affected
One of Bust-A-Move’s most popular break dance instructors, Megan Sutherland, also known as Mixmaster Meg, resigned from the studio and took up a position straight away in a competitor break dance studio less than 10 km away, and took many clients with her. Now, as my client, Bust-A-Move Break Dance Studios wants to stop Ms. Sutherland from breaching clause 14 of her employment contract.
DISCUSSION
Bust-A-Move may seek an injunction forbidding Ms. Sutherland from offering her services with a competing break dance studio.
Ms. Sutherland’s conduct is in direct breach of clause 14 in the standard employment contract to which both she and Bust-A-Move Break Dance Studio are signing parties. However, in order for this clause to be enforceable, it must be recognized as a valid covenant as determined by law.
At common law, injunctions can be granted as an equitable remedy to restrain the breach of a negative stipulation in a contract. However, the negative stipulation in question is a restraint of trade covenant. At common law, contracts in unreasonable restraint of trade are prima facie unenforceable and void, but will be enforced if the promise has a legitimate interest to protect and the scope and duration of the restraint are reasonable.
In New South Wales, reasonableness is affected by the Restraints of Trades Act 1976. This states that restraining covenants are valid to the extent of which it is not against the public interest. Ambiguity in this area is resolved by the courts.
The burden of establishing that a restraint of trade clause is reasonable is on the party who receives the benefit of the restraint. The common law recognizes certain interests that can be reasonably protected. An employee cannot entice away old customers by solicitation. Moreover, the employer may protect its business, by contractual restraint of reasonable width. The width that is reasonable is determined by the scope of the employer’s normal business.
Applying the law, Bust-A-Move’s restraint is of reasonable scope and width as one year, and 50 kilometres are realistic boundaries if the client can prove that it took over a year to establish customer ties and that those customers are based within the geographical limits. Even if they cannot prove this, it can sever wider ties and retain the narrowest limits, 3 months and 10 kilometres. The reasonableness of these limits is well supported by the common law and therefore the clause can be held valid.
As Ms. Sutherland has immediately enticed away old customers, within 10 kilometres of the client’s studio, it is clear that she has endangered Bust-A-Move’s business, and an interest recognized in law and public policy. She has also clearly breached a negative stipulation of a contract.
CONCLUSION
In closing, the restraint of trade clause in question can be held to be both reasonable and valid. As such, Ms. Sutherland has clearly breached an enforceable term of her standard employment contract with Bust-A-Move Break Dance Studio. Under breach of contract, Bust-A-Move Break Dance Studio can seek an equitable remedy in the form of injunction. The injunction can forbid Ms. Sutherland from breaching clause 14 of the contract, effectively stopping her from teaching with a competitor break dance studio.
