The recent case of DXC Eclipse Pty Ltd v Wildsmith [2023] is a warning to parties that restraint of trade provisions must be appropriate in the circumstances of the transaction to avoid being found unenforceable.
DXC Eclipse acquired a software development business, namely Sable37, in April 2018 from Mr Wildsmith. Sable37 offered, among other things, software solutions to Microsoft.
The sale of business contract contained provisions to the following effect:
- that Mr Wildsmith be restricted from carrying on a competing business during a maximum restraint period of seven (7) years (with the minimum restraint period being one (1) year);
- that the restraint was reasonable and necessary in the circumstances to protect the purchase value of Sable37; and
- that Mr Wildsmith was to continue as the Australia/New Zealand director of the business for at least one year post-acquisition.
Mr Wildsmith served in his position as director for a period of three years following DXC Eclipse’s acquisition.
Following this, Mr Wildsmith resigned and incorporated a new entity, namely “Will Thirty Three”.
DXC Eclipse sought an injunction to enforce the non-competition restraint clause against Mr Wildsmith in relation to Will Thrity Three. At first instance, DXC Eclipse’s claim was rejected as it was determined no breach had occurred.
DXC Eclipse appealed this decision. The Court of Appeal dismissed the appeal as:
- the nature of the software developed by Will Thirty Three differed from the software services offered by Sable37; and
- in the circumstances, the seven (7) year restraint period was deemed to be unreasonable.
The Court noted that:
Where the level of competition between a vendor and a purchaser of a business is slight, the greater the nature or extent of a non-competition restraint, the less it is likely to be reasonable. On this basis, the primary judge was correct to hold that the non-competition restraint was unreasonable in scope.
Further, it was held that there was no suggestion that Microsoft’s dealings with Will Thirty Three would have any effect on Microsoft’s relation with DXC Eclipse to the extent that injunctive relief would be reasonably necessary to protect the goodwill of Sable37.
While the reasonableness of a restraint is contemplated at the time a contract is entered into, its reasonableness must also be contemplated at the time a party seeks to enforce the restriction.
It was determined that Will Thirty Three would not pose a commercial threat to Sable37. Further, it was determined that DXC Eclipse could not demonstrate how the operation of Will Thirty Three (or any other company operated by Mr Wildsmith) subtracted from the goodwill which was present at the time of purchase.
While a purchaser may seek to include extensive restraint provisions in their sale of business contracts to protect the goodwill they have acquired, the purchaser must be mindful as to the reasonableness of the proposed restraint periods as to ensure that they remain enforceable.
If you would like advice or assistance in relation to commercial contracts, please contact our accredited business law specialists and Partners Justin Thornton on jthornton@marsdens.net.au and Rahul Lachman on rlachman@marsdens.net.au or otherwise by calling them on (02) 4626 5077.
The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.
