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Restraints of Trade in Victoria

Restraints of trade in Victoria are any clause in a contract – typically an employment or business sale contract – which restricts one of the contracting parties from engaging in certain kinds of competition. This competition may arise out of the goodwill of the business, or of the employee’s goodwill with the employer’s clients, or because of confidential information or trade secrets about one of the parties that could be used to the advantage of a competing business.

Restraints of Trade in Victoria

Types of restraint clauses

There are a number of different types of clause used in restraints of trade in Victoria. They may include:

  • Stopping an employee from working with a competing business in a specific field or geographical location;
  • Preventing an employee from approaching or soliciting an employer’s clients;
  • Preventing an employee from approaching or soliciting another employee of the employer to work for them instead; and
  • Restraining an employee from using or disclosing confidential information.

The same kinds of restraints may be included in a sale agreement and restrain the activities of the seller.

Unenforceable restraint clauses

Not every restraint clause will be enforceable and the general rule is that restraint of trade clause are prima facie (or on the face of it) against public policy and therefore considered to be unenforceable. For the restraint clause to be enforceable, it needs to be “reasonably necessary” in the circumstances to protect the “legitimate business interests” of the employer.  This means there are two requirements: that the clause is both “legitimate” and “reasonable”.

Things that the court may take into account when considering whether a restraint in an employment contract is enforceable include:

  • The duration of the restraint and the area of restraint;
  • The employee’s role at the business: for example, a senior executive may have greater access to information and significantly greater goodwill with clients than a junior employee.  Another example is where an employee’s role involves being intimately involved in providing services to a client;
  • The effect of the restraint clause on the employee’s ability to make a living;
  • The bargaining position of the parties in relation to each other at the time of signing the contract; and
  • The extent of the restraint clause, that is, what kind of activity is restricted.

Just because an employee may work for, or as a competitor, does not make a restraints of trade in Victoria clause enforceable.  It is important to remember that the onus is on the employer to show that the restraint of trade clause should be enforced.

Example of a restraint clause in Victoria

In the 2012 Supreme Court of Victoria case of Wallis Nominees (Computing) Pty Ltd v Pickett [2012] VSC 82, the employee Pickett was a specialist IT consultant. He had been working specifically with one of the employer’s main clients for 12 months. The employee then quit and took up a position with that client. The restraint clause attempted to prevent the client from providing services to a former client for 12 months. The Court found that this clause was unenforceable. The clause restricted the employee from providing services to any former client (even if the employee did not have personal contact with them) and that 12 months was too long as the employer could reasonably find someone else to take the employee’s position.  The employer failed in its appeal of the Supreme Court’s decision.

Gardening leave – an alternative to restraints

To get around the issue of a restraint clause potentially being unenforceable, some employers may place an employee whose employment has been terminated on “gardening leave”. This means that the employee may be asked to not attend the workplace during their termination notice period, as the employee may be exposed to sensitive information which the employer does not want to get out into the marketplace. As long as the employer pays the employee as normal, and does not breach any other aspects of the employment contract, the employer may not be unlawfully restricting the employee.

Court orders

If a court does find that a restraint of trade clause is enforceable, they can make a number of orders. They may grant an injunction forcing the employee to comply with the terms of the restraint, or stopping them from engaging in business elsewhere. They may also award damages for the loss of business the employer has suffered as a result of the employee’s unfair competition.

Things to remember

  • Clauses should only go far enough to protect reasonable business interests.
  • Clauses should not be designed merely to restrict competition.
  • While some restraints in a contract can be considered unenforceable, this does not mean that other restraints in the contract cannot be enforced.

For the reasons above, it is very important that anyone who is seeking to draft a restraint clause, or is asked to sign a contract which contains a restraint clause, gets proper legal advice first.

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