Restraint of Trade in the ACT

Restraint of trade clauses are clauses that restrain a party to a contract from engaging in activities in commercial competition with the other party. Restraint of trade clauses are valid only where they are reasonable in the interests of the parties and in the interests of the public. This page deals with restraint of trade clauses in relation to employment law in the ACT.

Legislation

The ACT does not have any legislation on restraint of trade clauses. Restraint of trade is therefore governed by common law.

Where do restraint of trade clauses appear?

Restraint of trade clauses typically appear in:

• contracts for the sale of a business
• employment contracts

Where a restraint of trade clause appears in an employment contract it is generally intended to have effect after the employment relationship has terminated. Examples of behaviours that an employee or former employee may be restrained from are:

• using confidential information belonging to the employer
• starting a business that is in direct competition with the employer
• starting employment with a company that is a competitor of the employer

Legitimate business interests

Under the common law, restraint of trade clauses have historically been presumed to be invalid or void for public policy reasons. This was because they are designed to restrict a party’s ability to trade or to be gainfully employed. However, over time, restraint of trade clauses have become more entrenched in employment contracts.

Courts have found restraint of trade clauses to be valid so long as:

• they are designed to protect the employer’s ‘legitimate business interests’; and
• they do no more than is reasonable for the protection of those interests.

What is reasonable in protecting a legitimate business interest will depend on a number of considerations including:

• the nature of the business activity of the firm and the trade, skill or profession that the employee possesses or to which the employee belongs;
• the geographical restraint area stipulated under the clause and whether it is reasonable to extend it as far as the contract does;
• the duration of the restraint;
• the extent of the employee’s involvement in procuring clients and maintaining business relationships.

Cascading restraints

To get around the uncertainty of what exactly is reasonable in the protection of its legitimate business interests, an employer may write what is known as a ‘cascading restraint clause’ into a contract.

A cascading restraint clause is a clause that is written in such a way that there is more than one option in terms of the ambit of what a party is restrained from doing or for how long they are restrained from doing it.  

While a restraint of trade clause will be struck out if a court finds it to be unreasonable and therefore invalid, a cascading restraint clause will be struck out only to the extent that it is unreasonable, with the remainder of the clause remaining enforceable.

For example, a cascading restraint clause may provide that an employee is retrained from starting a business that is in competition with the employer for:

1. 12 months after ceasing employment with the company;
2. Two years after ceasing employment with the company;
3. Five years after ceasing employment with the company.

A court considering the contract can then strike out the options that are unreasonable and uphold the one that is reasonable.

Wording of restraint of trade clauses

The precise scope of a restraint of trade clause is often determined by the way the clause is drafted. For example, a clause may stipulate that an employee may not ‘solicit’, ‘canvas’ or ‘secure’ clients or former clients of the employer.

While the word ‘solicit’ has a generally accepted meaning of actively going out to attract clients, ‘secure’ has a much broader scope and includes actions that resulted from the initiative of the customer/client.

When reviewing restraint of trade clauses in employment contracts or sale of business contracts, you should always consult a lawyer to determine the scope of the clause.

Relief for breaches of a restraint of trade clause

If an employer or a seller suspects an employee or purchaser of breaching a restraint of trade clause, they may seek relief by way of an injunction to prevent the breach from continuing.

A party may also also seek compensation for a loss of profits resulting from a breach. 

To seek either of these forms of relief in the ACT, a party must commence proceedings in the Supreme Court of the ACT. The application must be supported by evidence that the clause was breached and evidence of the losses the party suffered as a result.  

If you require legal advice or representation in any legal matter, please contact Go To Court Lawyers.