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A restraint of trade clause, also known as a non-compete or a non-solicitation clause, is a clause you will often find in employment agreements. The clause prevents an employee from acting in a way that will detriment their employer when employment has finished. Such actions may include taking customers, suppliers or staff from the employer. It can also include using the confidential information obtained during employment to compete with the employer. If you are preparing to resign and work for a competitor you should read through your employment contract. You should also do this if you are leaving to set up shop on your own. This will allow you to understand whether you are subject to a restraint of trade clause, and interpret how it applies to your circumstances. 

This article is a user guide on how to interpret your restraint of trade clause. It is important to note that the law relating to restraint of trade clauses is complicated from the outset. There is no one size fits all. The enforceability of a restraint clause depends on several subjective factors related to individual facts at hand.

What Does The Law Say?

Except for New South Wales, no state or territory-specific legislation governs the validity of restraint of trade clauses. 

Regardless of state or territory, the default position is that restraint of trade clauses are void, but will be enforceable only to the extent that it is reasonable in relation to the interests of the parties to the restraint and the interests of the public. 

How Will a Court Interpret a Restraint of Trade Clause?

When looking to enforce the restraint clause, the onus is on the employer to prove that the clause was protecting a legitimate business interest and that the clause itself is reasonable in scope. If the employer can prove this, the employee must show that the clause is not in the public’s interest to enforce.

A court determines what is both ‘reasonable’ and a ‘legitimate business interest’ by examining: 

  • the subjective factors of the employment relationship; 
  • contractual negotiations between the parties and the employee’s proposed new venture;
  • the level of remuneration and seniority of the role;
  • the extent to which the employee in question was the face of the business; and
  • the market in which the employer operates.

A court will also scrutinise the individual wording of the various sub-clauses of the restraint. A far-reaching restraint is less likely to be enforceable at all, as a court may not consider it to be reasonable. The most commonly recognised business interests are an employer’s trade secrets and good will (customers and clients) and staff.

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Examine the Available Evidence

To enforce a restraint of trade clause, the employer will need to be able to prove the employee’s actions presented a real risk to their business.

Examples of evidence commonly used in such cases include: 

  • emailing client lists to personal addresses;
  • misappropriation of client files or internal system documents and/or documentation showing the commonality of target markets;
  • soliciting clients to be serviced by a competing business; and
  • disclosing or misusing confidential information obtained during employment.

Consider Your Damages

Similarly, even if you can show a threat, there is no point enforcing a restraint unless you can demonstrate your business will suffer damages. A court cannot award damages to an employer if they cannot show that the breach resulted in a loss. Such damage does not necessarily have to be monetary. Often it is in the form of actual or lost revenue from an existing client base. It can also include a threat to confidential information, including future designs and marketing plans.

Key Takeaways

A restraint clause must have a reasonable geographical and time scope and protect a legitimate business interest or public interest to be enforceable. Indeed, an employer must prove that the employee’s actions have or are likely to be detrimental to the employer’s business interests. Ultimately, the detriment a breach causes to the employer is not limited to financial impacts. 

If you need help to interpret a restraint of trade clause, LegalVision’s commercial contract lawyers can help. Call them on 1300 544 755 or fill in the form on this page.

Frequently Asked Questions

What is the purpose of a restraint clause?

A restraint clause aims to prevent an employee from conducting themselves in a way that detriments their employer, even after they have ceased working for the employer. 

How can I find the restraint clause in my employment contract?

The restraint clause may also be labelled as the non-compete clause or the non-solicitation clause.

Are all restraint clauses automatically valid in court?

When looking to enforce a restraint clause, the onus is on the employer to prove to the court that the clause should be enforced because it is reasonable in scope and necessary to protect a legitimate business interest.

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