Restraint of trade clauses

A restraint of trade is a clause in an employment contract that is designed to protect a business’s interests by restricting an employee’s activities after they leave the business.

Queensland does not have specific laws governing restraints of trade, but case law and the Competition and Consumer Act 2010 (Cth) (the Act) determine the principles of such clauses.

Reasonableness

A restraint of trade clause is presumed to be void unless the restraint is shown to be reasonable.

To establish reasonableness, two elements need to be proven:

  1. there is a legitimate interest that needs protection by the imposition of the restraint; and
  2. the restraint goes no further than is necessary to protect the interest.

The onus is on the employer to prove that the restraint is reasonable to protect legitimate business interests. What is reasonable is determined by assessing factors such as the:

  • duration of the restraint;
  • geographical area over which the restraint is to operate;
  • activities to be restricted;
  • nature of the business and the characteristics of the former employee;
  • remuneration and compensation for the restraint;
  • impact on a former employee’s ability to earn a living; and
  • bargaining power between the parties.

A court may “read down” a restraint of trade clause that would otherwise be unenforceable. This means the court may enforce a restraint to a limited extent if enforcing it to the full extent would be unreasonable. An example would be when a restraint prevents a former employee from working with a specific list of businesses when not all of those businesses compete with the former employer.

It is important to note that the reasonableness of a restraint of trade clause is assessed according to the date the employment contract was signed, not the date the matter is heard in court. Thus, when an employee is given extra responsibility within a business, the employer should review any restraint of trade clause in the employee’s contract to ensure it adequately reflects the employee’s new role and reasonably protects the employer’s legitimate business interests.

Types of clauses

There are several types of restraint of trade clauses in employment contracts, designed to restrict certain activities. Most restraint of trade clauses operate when employment has ended.

Examples of restraint of trade clauses include:

  • confidentiality clauses — to prevent an employee from disclosing or using confidential information or trade secrets acquired during their employment;
  • non-compete clauses — to prevent an employee from entering a similar profession or setting up a business in competition with their former employer;
  • non-solicitation clauses — to prevent an employee from soliciting current or former clients or customers from their former employer; and
  • non-recruitment clauses — to prevent an employee from “poaching” staff from a former employer.

The particular circumstances of each case determine whether any such clause is effective and enforceable.

Ladder or cascading clauses

Parties may draft restraint of trade clauses with varying levels of restraint, so that if one level is found to be unreasonable, others may survive. However, there is a risk that the court may determine that the parties did not make a genuine attempt to define the protection, or that the clauses were too uncertain to have been agreed upon.

Enforcing a restraint of trade clause

Generally, an employer looking to enforce a restraint of trade clause will first seek an injunction to prevent the employee from engaging in an activity identified in the restraint.

If a contract contains a restraint of trade clause, it will usually also state the remedy for a breach of the clause, such as compensation for the damage caused by the breach.

Cartel conduct

Restraint of trade clauses can be problematic when it comes to “cartel conduct” provisions in the Act.

Under the Act, a corporation must not form a contract that contains a cartel provision, which is a provision that relates to:

  • price fixing; or
  • restricting outputs in the production and supply chain;
  • allocating customers, suppliers, or territories;
  • bid rigging.

Restraints of trade clauses are usually exempt from cartel conduct provisions but there is no general exemption, and whether a restraint falls foul of the Act will depend on the circumstances.

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Restraint of trade case example

Commsupport Pty Ltd v Mirow [2018] QDC 134

In this case, an information technology business (Commsupport) employed a computer technician (Mirow) under a contract which had a restraint of trade clause. The clause stated:

“For a period of three months from the date the employee’s employment with the employer concludes (for any reason), the employee may not directly or indirectly, in any capacity whatsoever:

(a) act for any person or entity (natural or otherwise) that the employer had or has as a client during the six month period immediately prior to the employment with the employer concluding; or

(b) contact or cause another to make contact with any person or entity (natural or otherwise) that the employer had as a client during the six month period immediately prior to the employee’s employment with the employer concluding, with a view to enticing that person or entity to use the professional services of the employee or a third party…”.

Commsupport sought damages from Mirow, alleging that he had breached the restraint clause while working within his own company after leaving Commsupport.

The clause was found by the court to be unenforceable because it went beyond what was reasonably necessary to protect the business’s legitimate interests. The judge stated:

“A point upon which restraints often fail in respect of the customer connection interest, is not that the employee sought to be restrained had no such relationship of influence over customers of the employer, but rather the restraint has been drawn so broadly that it applies not only in respect of those customers with whom there was such a relationship, but also to those whom there was no such relationship. It is at this point that the legitimacy of the interest gives way to the restraint being seen as one merely against competition. The employee could be considered to have no more influence over such customers than a stranger.”.

Contact Gibbs Wright Litigation Lawyers

Employers should seek legal advice before introducing a restraint of trade clause into an employment contract, and an employee should seek legal advice if an employer is introducing (or trying to enforce) a restraint of trade clause. The costs associated with a legal challenge to such a clause can be significant, especially if the unsuccessful party is ordered to pay the other party’s costs.

Call Gibbs Wright for a no-obligation consultation about your legal rights and options.

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