Restraint of trade clauses, sometimes referred to as “restrictive covenants”, prohibit or restrain employees or contractors (“workers”) from engaging in certain conduct after they end their engagement with your business. They operate to protect your business interests, namely your confidential information, intellectual property, and client list. Restraint clauses are an important provision in all workplace agreements to ensure your business interest and goodwill are adequately protected.

However, it is important to note that restraint of trade clauses are presumed to be invalid and unenforceable unless they can be shown to be genuinely necessary to protect your business’s commercial interests. They cannot simply be used to protect your business against competition in the market. As such, business owners must ensure such clauses are carefully drafted to avoid a finding that the restraint of trade provision is unenforceable against the worker.


Types of Restraint Clauses

There are three primary restraint clauses that are commonly found in workplace agreements:

  1. Non-compete clauses: this will generally dictate that a former worker must not compete against your business within a certain time period after they leave their engagement with your business. Such clauses may prevent a former worker from:
    1. working in the same industry as your business;
    2. working within a certain distance of your business; and
    3. establishing their own business in the same industry as your business.
  2. Non-dealing clauses: this will prevent a former worker from dealing with clients they had dealings with while they were working for your business for a period of time after ceasing their engagement with your business.
  3. Non-solicitation clauses: unlike the broader non-dealing clauses, this clause will specifically state that a former worker cannot actively seek out any clients, workers, or referrers of your business for a period of time following the end of their engagement with your business.


Requirements for Restraint of Trade Clauses

Whilst restraint of trade clauses offer significant protection of your business interests and goodwill, ┬áit is important to note that the restraints must be fair and reasonable. As stated in the leading High Court decision of Buckley v Tutty (1971) 125 CLR 353, the Courts will generally find a restraint of trade clause to be invalid and unenforceable if it is contrary to public policy and unreasonably interferes with the worker’s right to provide their labour to the public:

“unreasonable restraints are unenforceable as it is contrary to public welfare that a person should be unreasonably prevented from earning a living in whichever lawful way he chooses and that the public should be unlawfully deprived of his services.”

To ensure that a restraint of trade clause is reasonable and valid, it must protect your legitimate business interests, and go no further than is reasonably necessary to do so.

Legitimate Interests

It has long been upheld since the 1916 decision in Herbert Morris Ltd v Saxelby [1916] AC 688 that protecting your business against the unauthorised use and disclosure of confidential information and customer connections is a legitimate and protectable business interest.

Additionally, it has traditionally been upheld, as found by the Court in Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717, that safeguarding the maintenance and stability of your business’s workforce is a legitimate and protectable business interest.

No further than reasonably necessary

In determining whether a restraint of trade clause goes no further than is reasonably necessary, the Court will consider the scope of the clause and the restraints it imposes on the worker. The factors that will be considered include, but are not limited to:

  • activities the clause covers;
  • geographic area the clause covers; and
  • time period that applies to the clause.


Key Takeaways

Restraint of trade clauses are an effective way to protect your business’s interests, however, it is vital that these clauses are carefully drafted to prevent a Court from finding that they are unreasonable and unenforceable.

Workplace agreements should be reviewed on a regular basis to ensure they accurately detail your worker’s position duties and that any restraints go no further than reasonably necessary to protect the legitimate interests of your business. It is important to seek legal advice on the reasonableness and validity of your business’s restraint clauses to sufficiently protect your business’s interests and goodwill from any adverse conduct by your ex-workers.