Restraint of Trade

Restraint of Trade

All restraint of trade clauses are void because they are contrary to public policy unless the restraining party can establish that the restraint is reasonable (in the interests of the parties and the public) in all the circumstances and necessary to protect a legitimate interest of that party.

Restraint of trade provisions often relate to restrictions on employment, between business partners, and in contracts for the sale of a business.

Each case depends very much on its facts.  Protection against competition itself does not constitute a legitimate interest, however protection of trade secrets or business goodwill are considered by the courts to be legitimate interests.

It is said to be in the public interest that a person be entitled to carry on trade freely, to use his or her skills, experience and know-how acquired whilst in business or employment with former business partners or employers.

During employment employees owe a duty to their employer not to compete with their employer, not to solicit, deal or do business with clients of their employer.  However, these duties cease when employment ceases unless the employer protects its interests contractually by the use of an appropriately worded restraint of trade clause.

However, the duty not to misuse or disclose an employer’s confidential information does not cease to exist when employment comes to an end.  Regardless of this duty, appropriately worded clauses protecting confidential information are important.

Restraint of trade clauses are often drafted to provide different levels of restraint (known as cascading or ladder clauses) on the basis that if one or more levels of restraint are found unreasonable and therefore void, others may be found reasonable and remain operative.  However, there is a risk that ladder clauses can be found uncertain and held by the Court not to reflect a genuine attempt to define a reasonable restraint.

Where restraint of trade clauses are found to be reasonable and are breached, the restraining party can seek an injunction to enforce compliance and may claim damages or an account of profits.

For more information please contact our friendly and professional team at Peter Speakman & Co on 9822 8611.