Federal Court declines to stay restraint challenge despite foreign jurisdiction clause

In the decision of Harman v Opus Recruitment Solutions – Australia Pty Ltd (Stay Application) [2024] FCA 1356, the Federal Court of Australia declined to stay proceedings brought by a former employee who sought to challenge the validity of his post-employment restraints in his employment agreement and shareholder’s agreement despite the fact that the shareholders’ agreement contained a foreign exclusive jurisdiction clause.

This decision reinforces the significance of carefully drafted and structured post-employment restraint arrangements, particularly where there may be layered restraints across different contracts (including employment and shareholders’ agreements, as was the case in this matter).

What happened in this case?

In November 2021, Mr Harman entered into two agreements: an employment contract with Opus Recruitment Solutions – Australia Pty Ltd (Opus) and a shareholders’ agreement with Hexagon Topco Ltd (Hexagon) (a British-based entity that had ultimate control over Opus).

Both agreements contained post-employment non-solicitation and non-competition restraints but designated different jurisdictions for dispute resolution. The employment contract stipulated exclusive jurisdiction in New South Wales, while the shareholder’s agreement provided that disputes would be exclusively resolved in the courts of England and Wales.

In the event of termination of Mr Harman’s employment, the restraints under both agreements applied. In addition, his termination benefits were dependent on the circumstances giving rise to termination in that the price Mr Harman would receive for his shareholding (in the event of compulsory transfer upon termination of his employment) depended on whether he was categorised as a “Good”, “Intermediate”, “Bad”, “Very Bad” or “Subsequent Very Bad Leaver” (noting that the latter two scenarios arose in the event of termination without notice).

Mr Harman’s employment was terminated in February 2024. He subsequently initiated proceedings in the Federal Court of Australia to challenge the validity of his post-employment restraints under the restraint clauses in the two agreements, and to seek declarations regarding his termination entitlements (on the basis that his termination should be characterised as a redundancy).

Hexagon, supported by Graphite Capital Co-Investment IX LP (Graphite) (a related British-based entity), lodged an application to stay Mr Harman’s proceedings in the Federal Court of Australia on the basis of the exclusive jurisdiction clause in the shareholder’s agreement.

The key issue for determination by the Federal Court

The central issue was whether the Court should exercise its discretion to stay Mr Harman’s proceedings against Hexagon and Graphite on the basis that the shareholders’ agreement contained a foreign exclusive jurisdiction clause.

The Court noted that “Courts will ordinarily adhere to the agreement of the parties as to the choice of forum to ventilate their disputes, unless there are strong countervailing reasons to depart from their agreement.” Accordingly, although Hexagon and Graphite had applied for the stay of proceedings, it was Mr Harman who was required to establish that there were strong countervailing reasons why his proceedings should not be stayed.

Federal Court denied the stay application

The Federal Court of Australia was ultimately satisfied by Mr Harman that the stay application should be dismissed, such that he could proceed to challenge the validity of the restraints under the employment contract and shareholder’s agreement in New South Wales.

In reaching this decision, the Court held that this case “involves inter-related parties, intertwined contracts and obligations arising from the same factual source and two (conflicting) exclusive jurisdiction clauses” and accordingly, even though Mr Harman had expressly agreed to enter the shareholders’ agreement and agreed to the foreign exclusive jurisdiction clause, (and notwithstanding that ordinarily Mr Harman should be held to his bargain), the Court held that the “unusual circumstances of this case” called for the discretion to be exercised.

Notably, the Court considered the following matters when reaching its decision:

• There was no dispute that Graphite and Hexagon were interrelated with Opus (because Hexagon owned and controlled Opus) and separately, each of the entities had common directors. Graphite and Hexagon’s submission that they had no connection to NSW or Australia, including because neither entity had any offices, employees or operations in Australia, was therefore not persuasive.
• The two agreements were held to be “interrelated”. Both depended on the existence of an employment relationship, the employment agreement required compliance with the shareholders’ agreement, and they both conferred obligations and benefits including upon termination. By way of example, the Court noted that “Opus was able to terminate Mr Harman’s employment if he committed ‘any material breach or non-observance’ of the Shareholders’ Agreement”.
• Upon termination, Mr Harman was the subject of restraints under both agreements which, whilst drafted in different terms, both included interrelated and “expansive foundational definitions for the purpose of defining the scope of their restrictive covenants”. For example, both agreements included Australia as a restricted area, and both agreements referred to other countries in which any group company operated in. The benefits conferred to Mr Harman under both agreements also depended on the circumstances giving rise to his termination and how the cessation of employment was characterised.
• While the terms of the restrictive covenants in the two agreements were different, “the relevant substratum of facts overlaps”. The Court considered it was very likely that there would be clear factual overlap underpinning the construction of the validity of both restraints, as well as clear definitional overlap between both clauses as to the scope of the restraints, the identification of the business, the clients and the restricted area. Both agreements also restrained similar conduct. Accordingly, determination of the validity of the restraints would overlap and involve common factual findings.

Due to this overlap between the parties and contractual terms, the Court also found that compelling Mr Harman to litigate in two forums would increase the costs for all parties involved, require the same witnesses to attend both proceedings, and risk inconsistent findings on interrelated matters – wasting resources and creating inefficiencies. The prejudice to Hexagon and Graphite was held to be minimal.

Key takeaways for employers

This decision serves as a reminder to employers of the importance of well-drafted and properly structured employment agreements and post-employment restraints, particularly where there may be layered restraints across different contracts (including employment and shareholders’ agreements, as was the case in this matter).

Key takeaways from this decision include:

• Strategic structuring of post-employment restraints: Well-drafted post-employment restraint clauses can be a powerful tool for protecting business interests, including confidential information and client relationships, thereby maintaining competitive advantage and mitigating risks associated with employee turnover and poaching. This case highlights the need for employers to be strategic when structuring post-employment restraints, particularly where there is complex or interrelated contracting arrangements involving restraint provisions. This often arises in the context of business sales where senior employees are also shareholders in a relevant and/or related business.
• Critical interplay of contracting arrangements: Where there is complex, layered and/or interrelated contracting arrangements involving restraints (including, between employment and shareholders’ agreements), consideration should be given to the interaction between such contracting arrangements at the early drafting stage. By carefully considering the nature of relevant restraints, termination rights and obligations, and the operation and enforceability of restraints, including exclusive jurisdiction clauses, you can help mitigate jurisdictional conflicts and reduce unnecessary legal costs.

The Workplace Advisory and Disputes team at Gadens regularly provides advice about employment contracts and post-employment restraints and is able to assist you with any queries.

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Authored by:
George Haros, Partner
Jennifer Winckworth, Special Counsel
Ellie Pitcher-Willmott, Lawyer