LANCE WARMINGTON v AFFCO NEW ZEALAND Ltd NZEmpC AK
 NZEmpC 19
IN THE EMPLOYMENT COURT AUCKLAND
IN THE MATTER OF a challenge to a determination of the Employment Relations Authority
Stephanie Dyhrberg, counsel for first and second plaintiff
Mary Wilson and Rachel Webster, counsel for defendant
Challenge against Employment Relations Authority determination upholding enforceability of restraint of trade provisions in plaintiffs' employment agreements — plaintiffs (“Ps”) had senior positions in defendant company — three month restraint of trade clause in employment contracts — Ps alleged that in pre-contractual discussions with Director of Operations he said that the restraint was not worth the paper it was written on — Ps tendered resignations to work for competing company — whether restraint provision entered into as result of unfair bargaining and ought not to be enforced — whether restraint of trade provision reasonably necessary to protect proprietary interests of the defendant company — whether inclusion of confidentiality clause in agreement meant restraint provision was not necessary.
The issues were: whether O's reassurance had caused the P's to enter the restraint agreement as a result of unfair bargaining; whether the restraint of trade provision was reasonably necessary to protect AFFCO's proprietary interests; and, whether the confidentiality clause meant that the restraint provision was not justified.
Held: The Ps were not able to establish on the balance of probabilities that there had been unfair bargaining under s68 ERAct. There were inconsistencies with the Ps evidence and it was unrealistic to suppose that they had the virtually “word for word” recall that they claimed of conversations with O four and five years previously. On the evidence it was more probable than not that O had conveyed the general view that sometimes restraints of trade were held not to be enforceable but that AFFCO would seek to enforce such provisions. Taken in combination, what was said could not reasonably have reassured the Ps that the restraint provision was either unenforceable or that AFFCO would not enforce it. The Ps could not have relied on this. They were both experienced men operating at a senior level with commercial nous which was reflected in their ability to negotiate enhanced provisions in their employment agreements. It was accepted that the Ps had the opportunity to access legal advice.
It was inherently unlikely that if the conversations with O had taken place as claimed, the Ps would not have committed something to writing. O did not have a close relationship with either of the Ps (although the Ps initially claimed one) but O was a senior person within AFFCO who acted on AFFCO's behalf during key parts of the pre-contractual negotiations. O did not purport to be a lawyer or give specific advice on the enforceability of the restraint of trade clause. O could not reasonably have known that either of the Ps was relying on anything he had to say about the enforceability, as it was plainly a legal issue. His comment on enforceability was correct and not misleading and was followed up with a comment that AFFCO would likely take action to enforce the provision.
A restraint of trade would be unenforceable unless it could be justified as reasonably necessary to protect proprietary interests of the employer in the public interest. AFFCO had a strong proprietary interest in information that the Ps had access to. If passed on, it could be used to a competitor's advantage, including by benchmarking their performance against AFFCO plants throughout NZ to identify areas of poor performance. In their jobs the Ps received weekly and daily reports and over time the information contained in these reports provided information about trends within the AFFCO plants. Even if SFF was uninterested in expanding its market share into AFFCO's customer base the information would be more broadly useful and highly relevant in assessing where cost-cuts might be usefully made. There was no evidence that the information was available outside of AFFCO and information of this type would not normally be available to a competitor.
The existence of the confidentiality clause did not of itself render a restraint of trade provision unreasonable. Whether or not it was reasonable depended on the facts of an individual case ( ). The Ps both had senior positions in a highly competitive business environment. The Ps could not be expected to retain precise recollection of the details of each of the reports referred to but the information that they did have was likely to be of use to SFF. There were risks relating to inadvertent disclosure. The Ps both accepted that there had been prior instances of disclosing information taken from their previous employment. AFFCO had no way of knowing what information the Ps had accessed, or what (if any) information they had copied. The Ps had freely signed up to their agreements and were bound by them.
JUDGMENT OF JUDGE Christina Inglis
This is a challenge brought on a de novo basis against a determination of the Employment Relations Authority upholding the enforceability of restraint of trade provisions in the plaintiffs' individual employment agreements. The Authority determined 1 that the plaintiffs were subject to a three month restraint of trade. That period expires in mid-March. This challenge was heard on an urgent basis.
Both plaintiffs were employed as plant managers by the defendant company (AFFCO New Zealand Ltd) until mid December 2011. Mr Warmington was employed from March 2008 to manage AFFCO's Rangiuru plant at Te Puke. Mr O'Neill was employed from October 2007 to manage the Imlay plant at Wanganui. Both tendered their resignations in mid-September 2011, advising that they had been offered positions with Silver Fern Farms Ltd.
There was no dispute that Silver Fern Farms is a competitor of AFFCO's.
The plaintiffs entered into individual employment agreements with AFFCO at the time of their appointment. Each agreement contained a restraint of trade clause, in the following identical terms:
9.1 In order to protect the Employer's proprietary interests, for three months after the termination of this agreement the Employee agrees not to engage to work for or on behalf of an organisation in direct competition with the Employer, nor establish their own business in competition with the Employer.
9.2 For three months after the termination of this agreement the Employee agree[s] not to solicit in competition with the Employer the custom of any person who has at any time during the period of the Employees employment by the Employer been a customer of the Employer or who shall become a customer of the Employer as a result of any tender, negotiations, arrangements or proceedings made or taking place at the date of such termination.
9.3 Consideration for this restraint is included in the remuneration package provided in clause 5.1 of this agreement.
9.4 It is acknowledged that in view of the Employees position with the Employer and the Employees direct association with the customers of the Employer during your employment, the restraint provided in sub clause 9.1 is fair and reasonable and does not inhibit the Employees ability to earn a reasonable living.
Mr Warmington and Mr O'Neill both say that they raised concerns about the restraint of trade provision with Mr Ogg (Director of Operations) prior to entering into their respective employment agreements.
Sometime in 2007, Mr O'Neill was approached by Mr Ogg inquiring whether he was interested in the plant manager role at Imlay. Mr Ogg subsequently visited Mr O'Neill at his home and left him with a copy of a proposed agreement. Mr O'Neill had two issues with the proposals. He took issue with the amount of money on offer ($120,000). He also queried the restraint of trade provision, which was in the terms set out above. Mr O'Neill's evidence was that he told Mr Ogg that he did not like the restraint of trade provision and that he had “major issues” with it. He says that he remembers “word for word” the conversation that took place, and that Mr Ogg responded to the concerns he had raised by saying “don't worry about it, it's in all the contracts, but it's not worth the paper it's written on.”
Mr O'Neill negotiated an agreement to review his starting salary after three months. He also negotiated to have relocation costs and accommodation paid for by AFFCO. Mr O'Neill says that, based on the assurances he had received from Mr Ogg, he decided to enter into the agreement despite the restraint of trade provision remaining unchanged and despite the concerns he had identified in relation to it.
Mr Warmington applied for his role of plant manager in 2008 and was offered the position. He says that he was happy with the draft agreement, subject to two concerns. The first was in relation to the salary that had been offered and the second was in relation to the restraint of trade provision. He raised these concerns with the then operations manager, Mr Graham. Mr Ogg contacted Mr Warmington the following day and raised the restraint of trade issue. Mr Warmington says that he remembers the conversation “extremely clearly”, “virtually on a word for word basis.” He says that the conversation went...
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