Risky Business: What You Need to Know about Restraint of Trade Clauses
Posted on 31 January 2023
Maddison Thomson
Risky business: What you need to know about restraint of trade clauses
The arrival of the new year inspires a fresh outlook and drive, providing a prime opportunity for businesses to take bold steps and seek new commercial ventures.
Are you ready to draft that partnership agreement which you have been putting off for the past year? Or perhaps sign on the dotted line of that franchise agreement which has been on your mind since the Christmas break?
Clients often come to us looking to enter into a diverse range of commercial agreements. From our perspective, it is important that an agreement protects our clients and their business interests. We want to see your local business prosper and continue to contribute to the Sunshine Coast and the greater community!
A restraint of trade clause can be a neat trick to have up your sleeve when entering into an agreement. But beware: without proper drafting, these clauses may be ineffective.
What is a Restraint of Trade?
Restraint of trade clauses are frequently used in contracts to limit an individual's ability to compete with their previous employer after the end of the agreement.
A restraint of trade can also include:
- A non-solicitation clause (prohibiting an individual from soliciting customers or clients from a former employer);
- A confidentiality clause (prohibiting an individual from sharing confidential information obtained during employment);
- A garden leave clause (allowing an employer to require an individual to stop working for a specified period of time after termination); and
- An exclusive dealing clause (requiring an individual to only purchase goods and services from the employer).
We commonly see these types of clauses used in business sales and purchases, contractor agreements, franchise agreements, and shareholder agreements, to name a few.
In Queensland, these clauses are governed by the common law, as well as the Competition and Consumer Act 2010 (Cth) (CCA) and the Australian Consumer Law (ACL).
What to Consider When Drafting a Restraint of Trade Clause?
Courts generally view restraints of trade clauses with scepticism, as they may restrict an individual's ability to trade freely and compete, potentially hindering a fair and open economic environment.
For a restraint of trade clause to be valid, it must be fair under the circumstances. The responsibility of ensuring that the clause is reasonable falls on the party seeking enforcement.
Factors that will be considered by a court when determining the reasonableness of a restraint of trade clause include (but are not limited to):
- The geographical scope of the restraint;
- The duration of the restraint;
- The legitimate interests of the of party seeking to enforce the clause;
- The type of activity that is restricted; and
- The impact on the party which is subject to the clause.
If a restraint of trade clause is too broad or imposes unreasonable restrictions on trade, it may be considered void and unenforceable by a court.
For a restraint of trade clause to be enforceable, the following factors should be considered:
- Ensuring the restraint only protects legitimate business interests, such as confidential information or customer relationships;
- Tailoring the restraint to the specific circumstances of an employee and their role within the business;
- Limiting the duration and geographical scope of the restraint; and
- Avoiding any provisions which could be considered oppressive or harsh on the individual.
Key Takeaway
Restraint of trade clauses can be a useful tool to protect your business interests. These clauses, however, are subject to strict limitations under the law. If you wish to include a restraint of trade clause in your commercial agreement, you must ensure it is fair and does not excessively limit an individual's ability to compete in the market after the contract ends.
HOW CAN OMNIA LEGAL ASSIST YOU?
The Commercial Law team at Omnia Legal are trusted advisors that can assist with drafting restraint of trade clauses in your commercial agreement. We will work with the parties to ensure the final agreement reflects your key interests and protects your business venture.
This article provides general information on legal topics for educational purposes only, and should not be considered legal advice or recommendations. While we have taken care to ensure accuracy, Omnia Legal is not responsible for any errors, and makes no guarantees about the accuracy or completeness of the information. Links to third-party websites do not constitute an endorsement, and we are not liable for any damages that may result from using inaccurate or incomplete information. It's always best to seek legal advice for specific situations.