Restraint of Trade and Conflict of Interest Clauses

Restraint of Trade Clauses

There is a legal assumption that a restraint of trade is unenforceable unless the employer can prove they have a legitimate proprietary interest and that the restraint of trade is reasonable with regard to the circumstances. This typically requires the employer to establish a link between their proprietary interest and the duties and responsibilities of the employee who deals with those interests and the risk of breach. If the employer has proven these two elements, the burden then falls to the employee to show that the restraint is contrary to their personal interest and the general public interest.

The definition of proprietary interest includes three main categories: trade or customer connections, the stability of the employer’s workforce, and trade secrets.

When considering whether a restraint of trade is reasonable, the Court will consider the context of the whole of the agreement between the parties and against the background of the circumstances in which the contract was entered into. In general, a restraint of trade will be reasonable where it grants adequate, but no more than adequate, protection for an employer.

Reasonableness – Duration and Geographical Location

When determining reasonableness, the Court will additionally consider how long the restraint of trade lasts for. When considering the validity of the restraint’s duration, the Court will look at the facts and circumstances of the relevant company’s business, the nature of the interest to be protected, and the potential effect of an ex-employee opening their own business. Industry practice will also be taken into account. In general, the Court will rarely find a restraint of trade clause that lasts for longer than one year to be reasonable.

The geographical coverage of a restraint of trade is also relevant when determining reasonableness. Worldwide restrictions are typically found to be invalid, unless the restriction requires worldwide coverage to be reasonably effectual. The Court has upheld restraint of trade clauses where worldwide coverage was necessary because of the nature of the industry in question and the impracticalities of enforcing a less onerous restraint of trade clause; however, this is the exception, rather than the general rule.

Consideration

If an employee signs an employment agreement containing a restraint of trade provision, it is assumed there is consideration for the restraint of trade as this was part of the bargaining process. Therefore, a restraint of trade included in an employment agreement at the outset will not necessarily be unreasonable.

Restraint of Trade Clauses – Court Powers and Contracting Out of the Court’s Jurisdiction

If a party cannot prove that a restraint of trade clause is enforceable, the Court has a jurisdiction to alter a restraint of trade to make it enforceable or to delete it from the employment agreement. This typically involves reducing the geographical coverage and/or the duration of the restraint. We are unsure whether parties can later agree to alter an invalidated restraint to make it enforceable, as we have not been able to find any case law on this point.

If the Court finds that an employee has breached a valid restraint of trade clause, it may require the ex-employee to pay exemplary and/or compensatory damages. It may also issue an injunction preventing an ex-employee from carrying out the conduct which constitutes a breach of the restraint of trade.

Conflict of Interest Clauses

Case law seems to be silent as to the effect of conflict of interest clauses after the termination of an employment agreement. Therefore, if an employment agreement does not mention the effect of a conflict of interest clause post-employment, there is an argument that the conflict of interest clause no longer applies.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Should you need any assistance with this, or with any other Employment matters, please contact Hannah Carey – hannahcarey@parryfield.com or any of the team at Parry Field Lawyers should you need assistance – 03348 8480

Why is due diligence important?

Due diligence is an important aspect of buying or selling a property, both for the purchaser and the vendor. Decisions are made based on disclosures made in due diligence, therefore it’s important for both parties that the documents or information relied on are accurate and correct. Failing to undertake due diligence can have a potentially disastrous consequences, as a 2012 case shows.

In this particular case water rights were the issue. Altimarloch Joint Venture Limited contracted to buy 145.5 hectares of rural land, part of which they intended to plant in grapevines. Under the contract the water rights held by the vendors would be transferred to the purchaser. Those water rights were represented to allow 1,500m3 of water per day to be taken from a stream for irrigation purposes. The reality was that the property held resource consents to take only 750m3 a day from the stream.

The error came from a LIM Report issued by Marlborough District Council that was relied on by the vendor’s real estate agents when they were marketing the property for sale and also by vendor’s lawyers when preparing the agreement for sale and purchase. The vendors themselves were aware of the correct water-take figure but didn’t spot the error when signing the contract, relying as they were on their professional advisors.

If the vendor’s agent or lawyer had checked with the vendor themselves as to what consents they had or had obtained a copy of the resource consent from the District Council, which is easy enough to do, the error would have almost certainly been picked up.

Always check primary sources

The lesson learnt is not to rely on secondary sources, particularly when making specific contractual warranties about matters. Instead, do check the actual source documents that give the rights or govern the obligations.

In this instance the purchaser successfully claimed damages of $1,055,907.16 as a result of this misrepresentation, even though the difference in value of the land with the represented amount of water rights as opposed to the water rights it actually had was only $125,000.

The reason for this is that the court assessed the damages as the amount it would take the purchaser to put themselves in the position as if they did get what they contracted to purchase. The reason the damages were so high was because no further water rights were available from the stream; in order for the purchaser to obtain the increased water-take they had to construct a dam to store the sufficient water to take up the shortfall.

By using primary source documents mistakes like this can be avoided. Where agreements, easements or resource consents are referred to in other documents such as valuations, LIM Reports (as in this case) or property information packs compiled by real estate agents, it’s encumbent on both the purchaser and the vendor to check the source documents of the information.

In this case, because there was a specific contractual provision about the volume of water rights being transferred, the vendor (or in reality their professional advisors) were found liable to pay very significant damages when the correct information was readily available and could have been checked very easily.

Always thoroughly check documentation

The same applies to easements, leases, crops supply agreements or other sorts of resource consents. None of these documents should be viewed as ‘standard’ and the original documents should be read by a vendor to ensure that what they are representing is what is actually in the document. A purchaser must also check documentation to ensure that what they are contracting to buy is what can actually be acquired.

Used by permission, copyright of NZ Law Limited, 2017

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you. Please contact Paul Owens at Parry Field Lawyers paulowens@parryfield.com 03 348 8480

When purchasing a property, it pays to investigate the history of the buildings on the land. If there are no records of building consents having been issued by the council, then at best the buildings may have been constructed without council approval and may not comply with the building code. At worst, they may be dangerous for use and occupation.

Background To The Building Consent Process

The Building Act 2004 (“the Act”) governs all building works in New Zealand. It states that such work must comply with the building code. The code is made up of regulations which prescribe the functional requirements for buildings and the performance criteria they must meet for their intended use.

Before undertaking building work, the owner of the property must obtain approval from a building consent authority. Usually, the building consent authority is the local council. Council approval for building work is known as a “building consent”.

During construction and once construction is complete, the council will inspect the work to ensure compliance with the conditions of the building consent and the building code. If the council approves the work, then it issues a code compliance certificate. It is an offence to carry out any work requiring a building consent if the work is not in accordance with the terms of the building consent. Also, subject to some exceptions, until such time as a code compliance certificate has been issued, it is an offence to occupy the building.

What Happens When Building Work Has Been Done Without A Building Consent?

Building consents cannot be issued retrospectively. However, if the work has been completed and a building consent was required but not obtained, then an application to the council for a “certificate of acceptance” may be made. This involves the council inspecting the work to determine if it complies with the building code. If it does, then it may issue a certificate of acceptance. However, such a certificate cannot be issued if the building work was carried out prior to 1992 as the building code was not in existence prior to that date.

It is not uncommon to come across properties where the buildings on the land have been constructed with a building permit or consent but the work has either never been completed, or if it has, the council has not approved it. If the work was carried out prior to 1 January 1993 and provided that the building is not “dangerous” or “unsanitary” as defined in the Act, then the council cannot take any action to require the owner to complete the work in accordance with the original building permit.

Make Sure Your Contract is Conditional on Approval of a LIM Report

The best way to check that there are no unauthorised buildings on a property is to obtain a Land Information Memorandum (known as a “LIM report”) before you buy it. This includes a summary of all records held by the council in relation to the property including details of building permits, consents, code compliance certificates and certificates of acceptance. To protect your position, any sale and purchase agreement you sign should be subject to approval of a LIM report for the property.

It is worth remembering that although the absence of permits or consents may not pose a problem while you live in the property, it may well become a problem once you decide to sell it. For that reason, a LIM report is money well spent. It could save you a great deal more at a later date.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Please contact Tim Rankin at Parry Field Lawyers (348-8480) timrankin@parryfield.com

“An ounce of prevention is worth a pound of cure.”

For most small businesses, your lease will be one of your most important contractual documents. Get it wrong and the profitability of your business may be seriously affected. Even so it is common for business to sign up agreements to lease without getting legal help. The lawyers at Parry Field have considerable experience in helping tenants to negotiate lease terms that fairly protect the tenant from undue risk and cost.

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New Zealand’s Building Act 2004 (“Act”) impacts on vendors selling properties on which building work has been undertaken. Purchasers now often request evidence of compliance with the Act. Parry Field Lawyers provide legal advice on a range of property matters including buying and selling property.