A restraint of trade clause protects a party’s business by preventing a current employee or ex-employee from engaging in trade or employment with a competitor during or after ending the employment. Under the Restraints of Trade Act 1976 (NSW) a restraint of trade is presumed to be valid unless it conflicts with public policy. A restraint of trade will be considered against public policy if it is determined to be a “manifest failure” by the employer to try and keep it within reasonable bounds. Therefore, to be enforceable, a restraint of trade must be reasonable for your industry.
Restraint of trade clauses can be characterised as one of the following:
- Non-competition clauses – these prevent ex-employees from working with direct competitors for a specific period or distance post-employment;
- Non-solicitation clauses – these prevent ex-employees from soliciting clients and current staff; and
- Confidentiality – to protect confidential information and trade secrets.
By drafting a reasonable and appropriate restraint of trade clause, Burgess Thomson can effectively restrict employees from engaging with competitors and soliciting clients and staff.
What is ‘reasonable’ for a Restraint of Trade Clause?
To determine whether a restraint of trade clause is reasonable, the court will assess a number of factors including:
- The time period of the restraint;
- The geographical area of the restraint;
- How wide the restraint is; and
- Your former position.
If the restraint clause goes beyond protecting the business’ legitimate interests to the former employee’s detriment, it will not be enforceable. However, if the clause is considered reasonable to both parties, it is likely to be upheld and enforceable.
How can I enforce a Restraint of Trade Breach?
If you discover that an ex-employee has breached their restraint of trade, it is important to first send them a letter reminding them of their obligations. The letter should outline what conduct is in breach of the clauses (e.g. working for a competitor) and request that the ex-employee signs a formal undertaking to cease their breach within a specified time frame.
If the ex-employees continue to breach the Restraint of Trade clause, it is important to send a follow up letter. While this may seem like a waste, it is vital to show the court you have made an effort to stop the breach.
If the letters do not work, you may seek an injunction from the court. An injunction is a court order that restrains a party from carrying out a specific action. While an injunction may be a costly remedy, if you are successful, it would stop your ex-employee from performing the action causing the breach.
What are cascading clauses?
Often lawyers will implement cascading clauses when they draft restraint of trade clauses so that they impose different levels of restrictions. For example, a restraint of trade clause may include multiple geographical locations with varying degrees of seriousness. They are drafted this way to allow the courts to render invalid only certain parts of the clause, and let valid parts operate if they deem them reasonable.
An example of a cascading restraint of trade clause is as follows:
| Time | Distance |
| (a) Six months; or (b) Four months; or (c) Two months. | (a) Australia; or (b) New South Wales; or (c) Sydney. |
The court will pick the most reasonable option out a cascading clause to uphold. That way it is more likely a section of the restraint of trade clause will be deemed reasonable and enforceable.
When is a Restraint of Trade clause unreasonable?
In Just Group Ltd v Peck [2016] the Victorian Supreme Court considered whether the restraint of trade clause imposed against an employee was reasonable. The employer wanted to enforce a restraint of trade clause to prevent the company’s Chief Financial Officer from working with their competitor. This restraint of trade clause prevented the employee from working for 50 other brands. The Court determined that this restraint of trade clause was far too broad, as it went further than necessary to protect the legitimate business interests of Just Group Ltd. Therefore, it was found unreasonable and held unenforceable.
This article is intended to provide a general guide on the subject matter only.
If you need further assistance or advice regarding the above, contact James Thomson at Burgess Thomson on 02 4929 5602.
