Restraint Of Trade Clauses

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I was recently asked by a client to obtain a Barrister’s opinion in relating to specific restraint of trade clause in a commercial agreement that he had signed. I often get asked by clients about the enforceability of restraint of trade clauses and whether or not they are void.

Is a Restraint of Trade Void?

It has long been established at common law that a term of a contract that is an unreasonable restraint of trade is, in the first instance, contrary to public policy and void (Peters (WA) Ltd v Peters Ville Ltd (2001) 181 ALR 337).

Some general principles in relation to “reasonability” are as follows:

  1. Reasonable” means reasonable both in relation to each party and in relation to the public interest;
  2. The onus is on the party attempting to enforce the restraint provision to prove that the restraint is reasonable as between the parties (Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 317)
  3. The subject of the restraint bears the onus of proving that the restraint is in the public interest (Amoco Australia at 308, 317);
  4. It is not common however for restraints that are found to be valid as between the parties, to be against public interest;
  5. A restraint is reasonable in relation to the party seeking enforcement of the clause if it is necessary for the “adequate protection of that party”; it is reasonable in relation to the party sought to be restrain if it preserves the fullest liberty of action consistent with that protection (Brightman v Lamson Paragon Ltd (1914) 18 CLR 331 at 337 per Issacsj);
  6. The restraint therefore must be not wider than is necessary (Buckley v Tutty (1971) 125 CLR 353 at 476);
  7. Some agreements have an express term stating that the restraint is reasonable.  This is not conclusive evidence that a restraint is in itself reasonable (Queensland Co-operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260 at 268).

Is a Restraint in a Franchise Agreement Valid?

In order for a restraint to be reasonable, the party seeking to enforce the clause must establish an identifiable interest that they need to protect. In the case of a franchise arrangement, such recognised interest includes the interest of a franchisor in protecting patronage built up through the operation of the franchise, as well as the preservation of confidentiality of information provided to a franchisee, which could be used by the franchisee to compete with the franchisor.  (KA&C Smith Pty Ltd v Ward (1998) 45 NSWLR 702 at 722).

Is a Restraint on an Employee Valid?

The Courts have, generally speaking, drawn a distinction between restraint on employees on the one hand, and restraints of a commercial nature on the other (Geraghty v Minter (1979) 142 CLR 177 at 185). The general principle permeating these cases is that a person has rights to work in a trade or profession without unjust restriction. Restraints on employees competing with employers are normally valid only if required to prevent misuse of information or solicitation of customers (Artcraft Pty Ltd v Chandler [2003] QSC 102).

It is very important that each restraint of trade is considered individually, given the variations in the drafting of these clauses. Specific and detailed legal advice is needed in both the drafting and interpretation of these sometimes difficult clauses.

Please do not hesitate to contact me if you require assistance in relation to restraint of trade provisions in a contract.

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