Restraint of Trade Clauses (SA)

Restraint of trade clauses are clauses that prohibit a party to a contract from engaging in business that competes with the other party. They are most common in contracts for employment and may apply while a person is employed in a role and/or after they have left the company. This page deals with restraint of trade clauses in South Australia.

Common restraint of trade clauses

A restraint of trade clause can come in a variety of different forms. A restraint of trade clause may stop a party from working with one of their employer’s or former employer’s competitors. Alternatively, it may prohibit a party from trying to get business from their former employer’s customers, or from competing with their employer while employed by them. It may also prohibit them from divulging trade secrets.

The restriction imposed by a restraint of trade clause will only last for a specified period of time and usually only within a limited geographical area. If no time period or area is specified, then the restriction may be invalid.

If you are about to start a new job and there is a restraint of trade clause in the contract your employer wants you to sign, you should discuss the clause with them or seek legal advice as to how the clause might affect you in the future.

Clause must protect legitimate business interests

The common law accepts that in general, people should be free to exercise their capacities for work and trade however they see fit. Because of this, restraint of trade clauses are void and unenforceable unless there is a legitimate business interest the company needs to protect and the clause is reasonable in the interests of the parties and in the public interest.

If an employment contract has a restraint of trade clause in it because the employer (or former employer) has a legitimate business interest to protect and the scope and timing of the restraint is reasonable, then the clause will be valid and enforceable. The onus is on your employer or former employer to show this to be the case.

An employer may have a legitimate business interest to protect if it seeks to protect its relationships with existing clients from future competition, to protect its trade secrets from being disclosed to competitors or to protect its goodwill. However, a company simply trying to protect itself from future competition has been held not to be a legitimate interest. Restraint of trade clauses are therefore most commonly found in industries where an employee learns trade secrets, such as the food and pharmaceuticals industries.

When is a restraint of trade clause reasonable?

Whether a clause is reasonable will depend on all the circumstances of the case. 

A clause is unreasonable if it goes beyond what was necessary to protect the employer’s business. In assessing whether a restraint of trade clause is reasonable, a court will consider a number of factors, including:

• how long the restraint of trade clause lasts;
• the kind of work the person performed, including factors such as their role with their employer, their seniority, work duties and whether the role required them to deal with clients. If they were required to deal with clients or their work involved a high level of sophistication, such as access to trade secrets, a restraint of trade clause is more likely to be found to be reasonable;
• the geographical extent of the clause. This will depend on the nature of the former employer’s business. For example, if their market is solely limited to South Australia, it may be unreasonable to restrain the worker from performing a similar role in Western Australia.

“Cascading” clauses

In some jurisdictions, courts can “read down” a restraint of trade clause. This means that even if the clause is unreasonable, the court can modify it to apply in more limited circumstances (e.g. a clause that applies for two years can be read down to apply for only one year).

In South Australia, courts do not have the power to read down restraint of trade clauses. To address this, employers often include “cascading” restraint of trade clauses in employment contracts.

Cascading clauses consist of multiple alternative restraints that overlap. This means that if one or more restraints are unenforceable, they can be severed from the rest of the employment contract, and the restraints of trade that are reasonable can continue to operate.

Challenging a clause

If a party to a contract challenges a restraint of trade clause in court, their employer or former employer may seek an interlocutory injunction to prevent them from doing anything that would breach the restraint of trade clause in the interim.

The employer has the onus of proving to the court that the restraint of trade clause is reasonable in the protection of its legitimate business interests. If it discharges this onus, the onus then shifts to the other party to show that the restraint of trade clause is not in the public interest.

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