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LAW60003 Corporations And Contract Law
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LAW60003 Corporations And Contract Law
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Course Code: LAW60003
University: Swinburne University Of Technology
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Country: Australia
Question:
Can Computers Pty Ltd rely on the restrain clause that is imposed by it on Chu?
Can Computers Pty Ltd pierce the veil of System Pty Ltd and consider Chu to be violation of the restrain clause?
Answer:
Introducation
When any employer employs any person at any post, whether it is operations, clerical or managerial, then, such employees is acquainted with the working of the company. But, the knowledge that is attained by such persons is at risk when such persons leave the job of the employer. In order to preserve the self interest and the confidentiality and the business, the employers are allowed to restrain the acts of such employees or officers.[1]
This can be done when an employer while making the contract of employment incorporates a restrain clause according to which the employee or officer is not permitted to trade in the same business or to solicit employees or to act in certain way for a certain amount of time or at certain place. In Buckley v Tutty[2] and Peters (WA) Ltd v Petersville Ltd[3], such restrain clauses are held to be valid because the same are established to protect the legitimate interest of the employer, to preserve the business, to secure the good will and reputation of the employer which he has built over the years.[4]
But, when the restrain clause is not justified, that is when the clause is too long or when the restrain is illegal or which curtails the working capacity of the employees, then, such restrains are not permitted in law. In Spencer v Marchington[5], it was held that the restrain was for a 25 miles which is too wide and maximum restrain of 20 miles is justifiable. Further, in Briggs v Oates[6], the restrain of five years was held to be too long and was declared invalid. The restrain must be logical and must only preserve the legitimate interest of the employee in order to hold the same valid in law. any restrain clause which is too long in duration is found to be not justified in law.[7]
Further, when a company is established then it is artificial person in law and attains a feature of separate legal entirety which simply submits that a company is an independent body and cannot be associated with its employees of officers. It has the capacity to enter into contracts, to sue, to hold property independently. The acts of the company are in its own name and the officers cannot be held liable for the same. In Salomon v Salomon & Co[8], the court held that once a company is formed then its officers are not to be treated alike with the company. The company is separate and must not be associated with the acts of its officers.[9]
But, many a times, a company is formed in order to deceive people. For instance, to commit fraud, fabrication, agony, etc,. In such situation, the courts are willing to price the veil of the company and the acts of the company are considered to be the acts of the officers and they are then held personally liable for the same. In Gilford Motor Co Ltd v Horne[10], an ex officers wife formulates a company and solicits the clients of the officers company. Though the officer was not the director of the new company but the court pierce the veil and held that the officer is in fact the owner of the company with the main aim to solicit the clients of his previous company. Thus, to avoid any kind of fraud the veil of the company can be pierced so as to avail justice.[11]
The relevant law is applied to the facts
The law dealing with piercing the corporate veil of the company and the applicability of restrain clause is now analyzed on the given facts and scenario.
Issue 1
Chu was working with Computers Pty Ltd for past five years at the position of operations manager. Because of his managerial post, Chu is in constant touch with the clients of Computers Pty Ltd and is thus very well aware of their identities. Considering the knowledge and confidential information’s that are attained by Chu while working with Computers Pty Ltd, the Computers Pty Ltd has incorporate a restrain clause in the employment clause of Chu that he is not allowed to work in dealing with the retails of hardware and software of selling computer for next two years (after he cases to be the manager) within New South Wales.
It is submitted that the restrain imposed by Computers Pty Ltd on Chu is valid because the same is only for two years and the length of such a restrain is valid and is rightly established in Briggs v Oates.
Also, Computers Pty Ltd is aware that the information attained by Chu is very confidential and if the same is used by him to solicit the employee of the company then it is against its legitimate interest and will also trash its goodwill and business. So, as per Buckley v Tutty and Peters (WA) Ltd v Petersville Ltd, the restrain clause is also valid of business, interest and confidentiality of Computers Pty Ltd.
So, the clause is valid.
Issue 2
Now, after leaving the job with Computers Pty Ltd in March, Chu’s wife in April established a company in the name of System Pty Ltd. the main of the business of System Pty Ltd was same with that of Computers Pty Ltd, that is, they were also dealing in the retail of computer software’s and hardware. The System Pty Ltd was also soliciting the customers of Computers Pty Ltd who are within the knowledge of Chu. Though Chu was not in the board of directors of System Pty Ltd, but, the only director of the company was the wife of Chu.
The facts of the case are very similar to the facts of Gilford Motor Co Ltd v Horne. It is submitted that it is rightful in piercing the veil of the company at this stage because System Pty Ltd was established after a month when Cu resign with Computers Pty Ltd. System Pty Ltd was also soliciting the Computers Pty Ltd clients and was also dealing in the same business. The main aim of forming System Pty Ltd was only so that Chu can escape from the restrain clause that is imposed by Computers Pty Ltd on Chu.
So, Chu has very cleverly in order to avoid the repercussion of the restrain clause has established the company in his wife name and is dealing with all stuffs that he is prohibited to do under the restrain clause.
Concluding remarks
Since, the restrain clause is only for two years and only prohibiting the trade in New South wale, thus, the clause is valid and can be enforceable against Chu.
Also, the company System Pty Ltd was only made by the wife of Chu so that Chu can avoid the restrain clause that is imposed upon him. Thus, the veil should be pierced and the company and Chu must be considered as same and Chu must be held liable for violating the terms of the restrain clause.
References
Books/Articles/Journals
BROOKS, ADRIAN , ‘The Limits Of Competition: Restraint Of Trade In The Context Of Employment Contracts’ [2001] UNSWLawJl 27.
Caffrey, A. Bradford., ‘Guidebook to Contract Law in Australia’ (CCH Australia, 1991).
Latimer, Paul, ‘Australian Business Law 2012’ (CCH Australia Limited, 2012).
Tomasic Roman, Stephen Bottomley and Rob McQueen, ‘Corporations Law in Australia’ (Federation Press, 2002).
Case laws
Briggs v Oates [1990] IRLR 473
Buckley v Tutty – [1971] HCA 71.
Gilford Motor Co Ltd v Horne [1933] Ch 935
Peters (WA) Ltd v Petersville Ltd [2001] HCA 45.
Salomon v Salomon & Co [1897] AC 22 .
Spencer v Marchington [1988] IRLR 392
[1] Bradford. A. Caffrey, ‘Guidebook to Contract Law in Australia’ (CCH Australia, 1991).
[2] Buckley v Tutty – [1971] HCA 71.
[3] Peters (WA) Ltd v Petersville Ltd [2001] HCA 45.
[4] Paul Latimer, ‘Australian Business Law 2012’ (CCH Australia Limited, 2012).
[5] Spencer v Marchington [1988] IRLR 392.
[6] Briggs v Oates [1990] IRLR 473.
[7] ADRIAN BROOKS, ‘The Limits Of Competition: Restraint Of Trade In The Context Of Employment Contracts’ [2001] UNSWLawJl 27.
[8] Salomon v Salomon & Co [1897] AC 22 .
[9] Roman Tomasic, Stephen Bottomley and Rob McQueen, ‘Corporations Law in Australia’ (Federation Press, 2002).Top of Form
Bottom of Form
[10] Gilford Motor Co Ltd v Horne [1933] Ch 935 .
[11] Michael Adams, ‘Essential Corporate Law: Second Edition’ (Cavendish Australia, 2002).
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