Restraints of Trade (NT)

Restraints of trade clauses are clauses that may be included in a contract to prevent a party from doing certain things that compete with the other party’s interests. They are most commonly found in a contract for employment or in a contract for the sale of a business. Restraint of trade clauses are regulated by the common law and some provisions in the Competition and Consumer Act 2010 (Cth). This page deals with restraints of trade in the NT.

Types of restraint of trade clauses

Clauses regarding restraints of trade can be drafted in many different ways. Restraint clauses in employment contracts usually only take effect after the employment ends. For example, the clause may stipulate that for a certain period after a person’s employment they cannot approach, solicit or advertise to their former employer’s customers for business. Alternatively, it may prevent a person from working for a competitor for a certain period of time, or it may prevent them from using or disclosing their former employer’s trade secrets.

Generally speaking, the clause will only last for a certain period of time and within a particular geographical area; otherwise, a court may deem it unenforceable. A restraint of trade clause can also take effect during a person’s employment; for example, stopping an employee from running a side-business that competes directly with their employer. If a person is starting a new job and there is a restraint of trade clause in their proposed employment contract, they should discuss it with a lawyer.

Restraints of trade in the NT may be unenforceable

Under the common law, clauses stipulating restraints of trade in the NT are, as a general rule, void and unenforceable. This is because the law accepts that people have the right to use their skills, profession or trade as they see fit. However, restraint of trade clauses are enforceable if the current or former employer has a ‘legitimate interest’ to protect and the duration and scope of the restraint is ‘reasonable’. The employer has the onus of showing that this is the case. If they satisfy this onus, the onus then shifts on the emplyee to show why the clause is not in the public interest.

What is a legitimate interest?

Whether an employer has a legitimate interest to protect depends on the circumstances, but some things which have been accepted by the courts as legitimate interests include protecting trade secrets or goodwill, and protecting customers who knew you from moving to a rival.

However, simply preventing competition generally is not enough to be a legitimate interest. As such, restraint of trade clauses are mostly used in industries that rely on trade secrets to be competitive, such as the pharmaceuticals industry.

What is reasonable?

The reasonableness of a restraint of trade clause depends on the circumstances. If it goes beyond what is required to protect the employer’s legitimate interests, it will likely be unreasonable.

If a clause is unreasonable, a court in the NT cannot ‘read down’ the clause to something more reasonable. This means the clause will simply be unenforceable.

The following factors are relevant to whether a restraint of trade clause is reasonable.

• Its duration. If a restraint of trade clause lasts too long, it may be unreasonable.
• How far-reaching the restraint of trade clause is geographically. For example, if the employer’s business is limited to Darwin and the clause prevents the worker from working anywhere in the NT, the restraint may be too broad. This will ultimately depend on what kind of business the contract relates to.
• The employee’s role with the employer, including things such as their customer access, knowledge of trade secrets, and their seniority. Generally speaking, the more senior a position and the greater the person’s knowledge of the employer’s business, the more reasonable a wide-reaching restraint of trade clause is likely to be.

Enforceable restraints of trade in the NT

If an employment contract includes a reasonable restraint of trade clause, the party must comply with its terms. If they do not, the former employer may seek an injunction to prevent them from breaching it, or alternatively damages to compensate them for lost business or goodwill.

In some cases, a worker may be able to argue that a restraint of trade clause is not in the public interest – for example, if they are a doctor or a scientist in leading medical research.

Cascading clauses

Under the common law, unenforceable clauses in a contract can be severed from the rest of the contract. This means that whilst a restraint of trade clause may be unenforceable, the rest of the contract remains on foot.

To take advantage of this, some employers include cascading restraint of trade clauses in employment contracts. A cascading clause has multiple overlapping restraints, the first restraint having the widest scope, and the next and subsequent restraints reducing in scope. Each sub-clause (individual restraint) is stated to be severable from the rest if the court finds it to be unreasonable. Consequently, it allow the court to interpret the restraint by ‘reading it down’, such that at least one of the restraints will be enforceable, even if the others are not.

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