What is a Restraint of Trade?

Very broadly, restraint of trade is a term that encapsulates any clauses in any contract that prevents one party to the contract from engaging in certain conduct that the other party considers to be in competition. Such clauses may also be referred to as restrictive covenants.

It is common to find a restraint of trade clause in partnership agreements, contracts for the sale of a business, subcontractor agreements and employment agreements.

What conduct can be subject to a restraint?

There is no limit on what conduct could, in theory, be the subject to a restraint of trade clause in a contract. In practice, the restraint of trade clauses used will depend on the contract in contemplation.

We are commonly asked about restraints of trade in employment agreements. Restraints of trade in employment agreements often lead to controversy due to the stronger bargaining position of the employer and the effect such clauses can have on an employee’s future ability to earn an income.

Restraints in employment agreements usually cover the following conduct:

• Commencing work in competition with or for a competitor of your former employer;

• Inducing or attempting to induce clients of your former employer to become clients of your new business or for your new employer;

• Inducing or attempting to induce former colleagues to come and work in your new business or for your new employer. 

Is the restraint enforceable?

The starting position is that there is a presumption, as a matter of public policy, that restraints of trade clauses are not enforceable.  

However, this presumption can be rebutted by the party seeking to enforce the restraint by demonstrating that the restraint is reasonable, by reference to the interest it is seeking to protect, and that the restraint does not impose a restraint more onerous than is necessary to protect that interest.

For this reason, a restraint of trade clause ought to be constrained, at the very least, by a defined geographical area and by a defined period, and may have a cascading effect; for example:  

“(1) The employee agrees and undertakes that they will not, during the term of their employment and after their employment has ended, provide services to or be engaged by any business, or carry out any activity, that is competitive with the business of the employee.

(2) The undertakings in clause (1) cover the period of (a) 12 months; or (b) 6 months; or (c) 3 months after the end of the employee’s employment.

(3) The undertakings in clause (1) cover the distance of (a) 30 kilometres; or (b) 10 Kilometres or (c) 5 kilometres from the business location of the employer.”

By drafting the restraint clause in such a way, the employer can seek to enforce the maximum restraint, whilst mitigating the risk that the restraint will fail altogether because if the Court determines that 12 months is longer than necessary to protect the employer, it will then go on to consider whether 6 months is reasonable and so on.  

Further reading

The case of Birdanco Nominees Pty Ltd v Money (2012) VSCA 65 provides an excellent summary of the development of the law in this area and serves to show how the Courts will view restraints of trade clauses. In Birdanco, the Court upheld a restraint of 3 years in circumstances where an employee accountant left his accounting firm to take up employment with a client of that firm to perform and to provide those same services.[1]

The Birdanco decision can be contrasted to the decision in Wallis Nominees (Computing) Pty Ltd v Pickett (2013) VSCA 24, where the Court found that a restraint of 12 months was unreasonable. [2]

The above cases demonstrate that each case will turn on its own facts and circumstances.   

We recommend that you seek legal advice if you are entering into a contract that contains a restraint of trade clause, or if you are concerned about whether you may be in breach of a restraint of trade clause.  

How can DSA Law help?

If you have a restraint of trade issue and believe you could benefit expert legal assistance, please Contact Us or one of our Commercial Lawyers at DSA Law on (03) 8595 9580.

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[1] See generally, Birdanco Nominees Pty Ltd v Money(2012)VSCA 65.  The full case can be read here.

[2] See generally, Wallis Nominees (Computing) Pty Ltd v Pickett (2013)VSCA 24. The full case can be read here.