Breaching Post-Employment Restraints: A $500,000 Lesson

A recent Federal Court decision, AEI Insurance Group Pty Ltd v Martin (No 4) [2024] FCA 1110, highlights the potentially costly consequences for employees who breach post-employment restraint clauses contained in an employment contract. In this case, Craig Martin (Mr. Martin), a former account manager at AEI Insurance Group Pty Ltd (AEI), was ordered to pay $500,000 in damages after soliciting clients to follow him to a direct competitor, MA Brokers.

Case Overview

Mr. Martin had been the “face of the business” in AEI’s Queensland operations for over a decade, playing a significant role in building client relationships in the heavy vehicle insurance sector. He resigned from AEI in August 2022 and shortly after commenced employment with MA Brokers, a direct competitor. AEI began proceedings when it became aware that 45 of its clients had moved to MA Brokers following Mr. Martin’s resignation.

AEI sought to enforce the restraint clause in Mr. Martin’s employment contract, which prohibited him from soliciting or accepting business from AEI clients for 12 months after the termination of his employment. AEI argued that Mr. Martin had breached this clause by directly or indirectly encouraging clients to move their business to MA Brokers.

Judicial Findings

The Court accepted AEI’s argument that Mr. Martin had breached the restraint clause. While AEI’s case was largely circumstantial, evidence such as client communications, letters of appointment and Mr. Martin’s own actions in contacting clients shortly after his resignation supported the conclusion that he had solicited business in breach of his contract.

Justice Thawley found that Mr. Martin had directly solicited 16 clients and had a role in the movement of an additional 29 clients to MA Brokers. The Court noted that Mr. Martin’s actions were aimed at leveraging the client relationships he had developed during his employment with AEI, which constituted a breach of his post-employment obligations with AEI.

Despite challenges in gathering evidence, such as the destruction or tampering of Mr. Martin’s mobile phones, the Court ruled that AEI’s restraint clause was reasonable and enforceable given the nature of Mr. Martin’s role and his extensive involvement with AEI’s client base. The restraint was specifically designed to protect AEI’s legitimate interest in maintaining its customer connections.

Damages and Restraint Clauses

AEI sought damages for the loss of income from clients who transferred to MA Brokers. Justice Thawley assessed AEI’s potential losses at over $600,000 but settled on awarding $500,000 after considering that some clients might have moved without solicitation or could have left AEI irrespective of Mr. Martin’s actions.

Key Takeaways for Employers and Employees

1. Enforceability of Restraint Clauses: This case highlights the enforceability of reasonable restraint clauses, particularly when they are designed to protect customer connections developed during employment. Employers should ensure that these clauses are clear, reasonable and tailored to the specific circumstances of the employment.
2. Importance of Evidence: While direct evidence may not always be available, circumstantial evidence such as client communications and documents can be sufficient to establish a breach of restraints. Employers should act swiftly to secure any relevant evidence when enforcing restraint clauses.
3. Significant Financial Penalties: For employees, this case highlights the significant financial risks of breaching post-employment obligations. Mr. Martin’s failure to comply with his restraint clause led to a $500,000 judgment against him which is a stark reminder that breaches of contractual restraints can result in substantial penalties.

If you have any questions about post-employment restraint clauses and how they may impact you as an employer or employee, please do not hesitate to contact Nick Stevens, Josh Hoggett, Evelyn Rivera or Ayla Hutchison.