Employment law contracts – restraint of trade provisions

Restraint of Trade
Business owners, in an attempt to protect the goodwillof their business will often include ‘Restraint of Trade’provisions in employment agreements, partnershipagreements and sale of business agreements. ‘Standard’clauses are often used instead of tailoring a clause tosuit the specific circumstances

What are ‘restraint of trade’ clauses?

They are a means for employers and partnerships to prevent departing employees or partners from taking clients or competing with the business for a period of time after they leave. They can be very important particularly for businesses that rely on client relationships.
Restraint of trade clauses are also used by people buying a business to stop the seller from starting up a competing business immediately after the sale.
Usually the courts will be less likely to uphold a restraint between an employer and employee than one preventing a seller setting up in competition. This is because an employee restraint is effectively preventing an employee from working in his or her chosen field whereas a restraint in a business sale agreement can benefit both the seller and purchaser. It can benefit the purchaser by restraining the seller from competing with the purchaser after the sale and it can benefit the seller as the giving of a restraint often increases the value of what is sold.

What are the risks?

Courts will usually only enforce restraint clauses if they are ‘reasonable’. In New South Wales, the Restraints of Trade Act 1974 allows a court to ‘read down’ the terms of a restraint clause to modify it (as to the time period or geographic area etc) until it is reasonable.