RESTRAINT OF TRADE Employees taking your clients when they leave
Restraint of trade clauses attempt to restrict a former employee's conduct once the employment relationship has ended. These clauses can prevent an employee from working for competitors or dealing with clients and staff when their employment terminated. They can have serious consequences for future employment and business opportunities. Well-drafted restraint of trade clauses in employment contracts are the only way employers can prevent former staff poaching their clients and staff. However, in drafting such clauses employers should consider how the restraint legislation varies from state to state, understand what the courts will consider "reasonable", ensure that employees understand the effect of such clauses, and how cascading clauses may (in some instances) provide an advantage should a court find other clauses to be unreasonable.
In Australia the common law doctrine of restraint of trade continues to operate where it does not conflict with the Competition and Consumer Act 2010.
Briefly, the doctrine renders provisions which impose restrictions on a person's freedom to engage in trade or employment illegal and therefore unenforceable at common law unless reasonable, both in the interests of the parties and in the interests of the public.
Restraint of trade clauses in commercial contracts are very useful tools in certain circumstances, but their use needs to be considered carefully due to the predilection of the Courts to read them down or strike them out.
The underlying purpose of a restraint of trade clause is to protect a party’s business from competition. They operate by restricting or interfering with a party’s liberty of action and the freedom to earn a living. It also goes against the general public interest of freedom of competition and trade.
Because of the oppressive nature of restraint of trade clauses, the common law provides that all restraint of trade clauses are presumed void and unenforceable, unless the clause:
a) Is reasonable in the interests of the parties; and b) Is reasonable in the interests of the public.
The Courts will look at a wide variety of factors when determining whether a restraint of trade clause is “reasonable”, which may vary depending on the factual setting in each case. However, some key considerations are:
a) The period of the restraint of trade clause (i.e. one year compared to five years); b) The geographical limit of the restraint of trade clause (i.e. Hobart CBD compared to the State of Tasmania); and c) The extent of the restraint of trade clause (i.e. what breadth of activities it prevents a person from engaging in).
This common law position has been altered in some aspects by the introduction of the Competition and Consumer Act 2010 (Cth) (‘Act’). Section 45 of the Act generally prohibits a corporation from entering into agreements that contains provisions which have the purpose or effect of substantially lessening competition.
Restraint of trade clauses can still be used in certain circumstances, such as sale of business agreements (which includes sale of goodwill) or particular employment arrangements, provided that the clause is sufficiently limited in scope so that it is considered “reasonable” with regard to the specific factual setting of the agreement.
In situations where there is a risk that a court may find a restraint of trade clause unreasonable and therefore void, cascading restraint of trade clauses are a useful drafting tool to avoid that risk.
This information should not be taken as legal advice as it is of a general nature. The information is provided solely on the basis that readers will be responsible for making their own assessment of it. We recommend that you obtain independent legal advice from a solicitor if you wish to assess the suitability of the information contained herein.