Restraint of Trade Clauses in New South Wales | Civil Lawyers NSW

If you have worked in an industry or role that relies on trade secrets or specialised employment skills (for example, for a food or cosmetic company), your employment contract may have included a restraint of trade clause. Restraint of trade clauses in New South Wales are designed to prevent a person from using the skills and knowledge they obtained with their employer to either compete with the employer or do something else that will negatively affect the employer. These clauses often apply both during a period of employment, and for a period after the employment ends.

Restraint of trade clauses are regulated in all the states and territories under the Competition and Consumer Act 2010 (Cth). New South Wales is the only jurisdiction that has its own rules dealing with restraint of trade clauses. These rules are contained in the Restraints of Trade Act 1976.

Types of restraint of trade clauses

The most common types of restraint of trade clauses take effect after a person’s employment ends. For example, a typical restraint of trade clause prohibits a person for a fixed time from seeking employment with a competitor of their former employer (eg if their former employer worked in the cosmetics industry, they would be prohibited from working for another cosmetics company).

Alternatively, it may prohibit a person from starting a business in competition with their former employer, or from disclosing its trade secrets to another person.

Restraint of trade clauses in New South Wales will generally only apply for a certain period of time and over a certain geographical area. This is because restraint of trade clauses need to be reasonable in accordance with the rules below to be valid. If a person is asked to sign an employment contract that includes a restraint of trade clause, they should speak to a lawyer first.

Enforceability

As a starting position, restraint of trade clauses are by their nature void and unenforceable. However, the common law accepts that a restraint of trade clause is legally enforceable if it was prepared because of a legitimate interest that a person’s employer (or former employer) wants to protect, and provided the clause is reasonable both in terms of the period for which it applies and its geographical scope. An employer (or former employer) has the onus of showing this. If it is satisfied, the employee then has the onus of showing that the clause is not in the public interest (this public interest element has not been relied upon much, but it may be satisfied in cases where, for example, you are doing important research such as cancer research).

If a restraint of trade clause is enforceable, the person must comply with it or their employer (or former employer) may be entitled to damages or an injunction preventing them from committing further breaches.

Legitimate interest

Restraint of trade clauses are only enforceable if the employer or former employer is protecting a legitimate interest. Minimising competition is generally not enough to create a legitimate interest. However, protecting other things such as trade secrets and goodwill may suffice as a legitimate interest.

Reasonableness

Restraint of trade clauses must also be reasonable. What satisfies this reasonableness requirement ultimately depends on the individual circumstances.

In New South Wales, under the Restraints of Trade Act 1976 the Supreme Court of New South Wales can read down an invalid restraint of trade clause, but only if it concludes that the clause is against public policy and can be read down so that its application is no longer against public policy.

The facts of the case relevant to determining whether a restraint of trade clause is reasonable include:

• How long the clause will last for. For example, a restriction that lasted for 15 months in New South Wales was held too last for too long.  It was read down to apply for 12 months.
• The geographical reach of the clause. Generally speaking, the geographical reach should be no more than is necessary to protect your employer or former employers’ legitimate interests. For example, if your former employers’ business was limited to the north shore of Sydney, it would probably be unreasonable if the clause prevented you from working anywhere in New South Wales.
• Your former position. For example, if your role with your former employer meant you had access to their trade secrets, or alternatively had direct access to their customers, the restraint of trade clause may be more reasonable.

Cascading clauses

It is not uncommon for restraint of trade clauses to be drafted so that they impose different levels of restrictions. For example, one restraint of trade clause may include multiple geographical restrictions with varying degrees of seriousness. These are called cascading clauses, and they are drafted in this way in most States and Territories because it allows courts to render invalid only certain parts of the clause, and let the valid parts continue to operate.

This kind of drafting is not as necessary in New South Wales, because the Supreme Court of New South Wales under the Restraints of Trade Act 1976 has the power to read down restraint of trade clauses so they have operative effect. However, this power can only be exercised if the Supreme Court concludes that the clause is inconsistent with public policy.

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