Restraint of Trade Clauses

Author: Megan Adams, Progressive Legal

If you are an employer, is it likely that you may be considering or already have restraint of trade clauses in your employment contracts. Such clauses are quite important in order to prevent an employee or ex–employee from doing something which may directly or indirectly affect your business.

While this sounds ideal for a business, restraint of trade clauses can be very technical.  As such, it is important to understand some risks associated with the incorporation of restraints of trade clauses in your contacts.  

What is a restraint of trade clause? 

A restraint of trade clause is a provision commonly included in employment contracts or agreements. Its purpose is to restrict an employee’s activities and behavior after leaving the company, usually for a specified period of time and within a specific geographic area. Now, let’s delve deeper.

What are the types of restraint of trade clauses? 

There are generally two types of restraint of trade clauses, these are non-competition and non-solicitation clauses. 

Non competition clauses aim to prevent employees from competing with their employer after the cessation of their employment. 

Non-solicitation clauses aim to stop former employees from soliciting or dealing with clients for a period of time after their employment ends and/or soliciting other employees to leave the business of the former employer. 

When are restraint of trade clauses enforceable? 

At common law, restraint of trade clauses are enforceable if: 

1. the employer has a “legitimate protectable interest” (Tullett Prebon (Australia) Pty Ltd v Purcell (“Tullet”) [2008] NSWSC 852 at [47]); and  
2. the restraint of trade clause is “no more than reasonable” for the protection of that legitimate interest (Tullett at [47]).   

It is important that restraint of trade clauses are drafted carefully, as the Courts will not enforce these clauses unless these limbs are satisfied.  

Further, the onus of showing that the restraint goes no further than is reasonably necessary to protect the interests of the person in whose favour the restraint operates lies on the party seeking to support the restraint as reasonable (Adamson v New South Wales Rugby League Limited (1981) 27 FCR 535, 554 per Hill J). In an employment context, this would be the employer.  

Restraint of Trade in NSW – A Brief Overview  

In Steadfast IRS Pty Limited v Latchmi Mesuria [2020] NSWSC 947 the Court affirmed and summarised previous authorities. Some points to consider are that:  

The position in NSW regarding restraint of trade clauses has to be viewed in light of s 4(1) of the Restraints of Trade Act 1976 (NSW) (“the Act”). “The effect of the Act is to allow the restraint to be read down so as to be valid to the extent necessary only to capture the conduct of the offending party, if a restraint to that extent would have been valid” at [43].  

The steps in NSW are generally: 

Determine whether the offending conduct comes within the clause; (Orton v Melman [1981] 1 NSWLR 583 at 587); 

Determine whether the restraint as it pertains to the alleged breach is against public policy; and  

If it is not, the restraint is valid, although the Court is empowered to make an order invalidating or reading down the restraint under s 4(3) of the Act (see Orton v Melman (1981) 1 NSWLR 583, 587; Woolworths Ltd v Olson [2004] NSWCA 372 at [42])  

The validity and reasonableness of the restraint is determined at the the parties agree to it. However, when exercising its discretion to grant relief, the Court considers matters as at the date of the hearing, including matters pertaining to the defendant (see Otis Elevator Company Pty Limited v John Nolan [2007] NSWSC 593 at [17]-[30]; and John Fairfax Publications Pty Ltd v Birt [2006] NSWSC 995 at [45]-[46]). 

The effect of s 4(1) of the Act requires, for the purposes of determining the validity of a restraint, that attention is focused on the actual or apprehended breach, rather than imaginary or potential breaches (citing Izaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343 citing Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9; [2006] NSWSC 717 at [10] (Brereton J)). 

What is a legitimate protectable interest? 

Protectable interests include: 

1. any customer connections or “goodwill” 
2. confidential information; 
3. trade secrets; and or  
4. retaining current employees of the company.  

However, an employer is not entitled to be protected against “mere competition” (Tullet, [47]).  

As the employer bears the onus of proving that the restraint is reasonable, the employer may have to prove that the restrained party has:  

1. relevant knowledge that would make the restrained party a competitor;  
2. influence – insofar that the restrained party was the face of the business and can take customer connections from the employer; or 
3. solicited other clients or employees to leave the employers business.  

Limb 2: What is reasonable? 

In considering whether a restraint is reasonable, the Court may consider a range of matters including:  

1. the duration of the restraint;  
2. the geographic area of the restraint;  
3. the activities that the restraint applies to; 
4. nature of the industry; and 
5. whether the employee has confidential information about the business, and the nature of that information.  

What can you do if an (ex)employee has breached restraint of trade clause? 

It is difficult to assess what will come of a restraint of trade clause as only the Courts can determine the validity and enforceability of a particular restraint in all the circumstances.  

In many cases, an employer’s first step is to send a letter to the employee to put the employee on notice that they have breached the clause and to request that the employee provide undertakings to not breach the clause further. 

However, where the situation is more complex and such approach proves futile, an employer may adopt more aggressive measures. This may include: 

1. commencing proceedings and alleging a breach of contract and/ or fiduciary duties. In such circumstances, the employer may apply for compensation or an injunction to restrain the contravening conduct should it be ongoing; or 
2. consider alternative dispute resolution methods such as mediation to obtain an out of court settlement.  

Proceedings to enforce a restraint clause can be very expensive and highly technical.  If you are considering pursuing someone to enforce one of these clauses, it is important to seek legal help as early as you can. 

Key Takeaways

Restraint of trade clauses can be complex, particularly when attempting to ascertain their enforceability. If you require restraint of trade clauses to be incorporated into your employment contracts, consider: 

1. whether the restraint protects a legitimate interest for your business; and  
2. whether the restraint is objectively reasonable.  

If you require any advice in relation to employment contracts or restraint clauses, fill out our online contact form on this page or contact our office at 1800 820 083 to speak to one of our experienced employment lawyers. 

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