Michelle Makela is one of our Legal Practice Directors and the National Practice Manager. She holds a Bachelor of Laws, a Bachelor of Science (Psychology) and a Master’s in Criminology. Michelle has had a varied career, working in commercial litigation, criminal law, family law and estate planning. Michelle joined Go To Court Lawyers in 2011. She now supervises a team of over 80 solicitors across Australia.
Restraints of trade in Queensland are clauses in a written contract which purport to restrict one of the contracting party’s ability to trade. They are most commonly found in employment contracts for professionals or skilled tradespeople who may work closely with the employer’s clients or will have access to trade secrets and other confidential information. Restraints of trade in Queensland are also commonly found in sale of business contracts, restricting the seller from setting up in competition with the purchaser of the business.
Unlike New South Wales, Queensland does not have specific legislation dealing with restraint of trade clauses. The principles of restraints of trade in Queensland are therefore found under the common law. Some other legislation may affect restraint of trade clauses (with limited application), such as the Competition and Consumer Act 2010.
General principles of restraints of trade
Restraint of trade clauses are presumed to be void for public policy reasons, unless the party who is seeking to rely on the clause can demonstrate that it is reasonable, having regard to the particular circumstances. The onus of establishing that the restraint is reasonable (and therefore valid) rests on the party who is seeking to enforce the restraint. That party must demonstrate that the restraint is necessary to protect its legitimate business interests, and that it goes no further than is necessary to afford that protection.
What is reasonable protection will depend on a number of factors including (in the example of an ex-employee):
- The duration of the restraint. A restraint of trade cannot operate indefinitely, otherwise it will be void.
- The geographical area of the restraint. A restraint cannot purport to restrict the employee from engaging in business anywhere in the world; if it does so, then it is void.
- The activities which are restrained. If an employee was a lawyer (for example) and the restraint purports to restrict the lawyer from engaging in other business activities such as opening a cafe, then it is void, as the new business venture does not pose a risk to the old employer’s business activities.
- The ex-employee’s role within the business. If an employee has not had any contact with the clients of the business, then a restraint of trade may be unreasonable in the circumstances and therefore void.
- The bargaining power between the parties. In most circumstances, the employer will have the most bargaining power.
If a Court is required to consider the reasonableness of the restraint, it will determine whether the restraint was reasonable as at the time of entering into the contract. However, the events and extent of the employment relationship between the time of entering into the contract and the time the Court is considering the restraint will still be relevant in determining what is adequate protection for the employer.
How restraint of trade clauses operate
Most restraint of trade clauses in employment contracts will operate after the employment relationship has terminated, by restraining the ex-employee from soliciting or attempting to solicit clients or customers, or former clients or customers. They may also restrict an ex-employee from soliciting other employees of the employer’s business. The restraint can go beyond mere solicitation (often used interchangeably with procuring), and extend to ‘approaching’ clients or customers or ‘accepting an approach’ from a client or former client.
Most restraint of trade clauses are now drafted by solicitors in a way which is known as a ‘cascading restraint’. This simply means that the clause will stipulate several alternative restraints with gradually decreasing scope in geographical area or duration. In the event a Court considers the restraint and decides that the widest restraint is unreasonable, it can then decide that one of the alternative restraints is reasonable and therefore enforceable.
The burden is always on the party who seeks to rely on the restraint of trade clause to prove that it is reasonable in order to protect its interests.
Legislation regarding restraints of trade
Queensland does not have specific legislation regarding restraint of trade clauses, unlike New South Wales. However, some provisions of the Competition and Consumer Act 2010 apply to prohibit restrictive trade practices. Employment contracts, partnership agreements and some sale of business contracts are excepted from these laws.
Enforcing restraint of trade clauses
Typically, if a contract contains a restraint of trade clause it will also state that the remedies for breach of the clause include that the party affected by the breach may seek an injunction, along with any other remedies such as compensation for damages caused by the breach.
Injunctions are usually obtained through commencing urgent proceedings in the Supreme Court of Queensland and can be obtained prior to a final hearing on the issue of whether or not a restraint of trade has been breached. These kinds of injunctions are known as ‘interlocutory injunctions’.
