As a business owner, it is essential you understand restraint clauses and how they can protect your commercial interests. A restraint of trade clause is an important tool for protecting your business. They are seen in various commercial contracts, including:
- employment contracts;
- shareholder agreements; and
- franchising documents.
Typically these clauses will restrict conduct or the use of certain assets/property pertinent to the commercial relationship. A breach of a restraint of trade clause can significantly impact your business if not effectively mitigated. This article will outline the steps you can take to enforce a restraint of trade clause.
Establish That You Have a Restraint of Trade Clause
As a first step, you should check whether your agreement contains a restraint of trade clause. Commonly, restraint of trade clauses will take the form of either:
- a non-competition clause; or
- a non-solicitation clause.
Restraint of trade clauses will also include time limitations for their operation, which include the duration of the agreement and also certain periods of time after the agreement has ended. They will typically also include geographical restrictions, particularly where the nature of the agreement revolves around providing products/services to a specific region or area.
In practice, restraint of trade clauses are drafted in a cascading manner, as below.
| Time | Distance |
| Nine months; or Six months; or Three months. | Australia; or New South Wales; or Sydney. |
This format allows courts to determine the reasonableness of particular restraint terms regarding the relevant circumstances. These limitations are important as a court will not enforce a restraint of trade clause if it is unreasonably long or geographically wide.
What Can You Do Regarding a Breach
Despite their importance in contractual relationships, restraint of trade clauses are highly susceptible to breach. Outlined below are the steps you should take if you become aware of a breach.
1. Gather Information
If you know that a party is engaging in conduct that would breach the restraint of trade clause, you should gather as much evidence as possible. Such evidence may include:
- any internal logs or messages owned by your company;
- any statements or correspondence from third parties;
- any communications arising from the employee’s emails, if you are their employer; and
- a demonstration of their breach.
2. Write a Letter
Once you have gathered evidence, you should contact the party in breach. The purpose of this is to:
- put the other party on notice that you are aware of their breach; and
- allow them to remedy it.
Typically this will be drafted in good faith. The letter should include the following information:
- a reminder of the party’s obligations under the clause;
- an outline of the conduct that goes towards a breach of the clause; and
- a request for the party to stop the aforementioned conduct within a certain time frame.
What Can You Do if the Breach of the Restraint of Trade Continues?
1. Write a Follow-up Letter
If the other party continues to breach the restraint of trade, you should send another letter reiterating the previous one’s terms. This letter will importantly demonstrate that you have attempted to resolve the issue amicably and commercially.
2. Take Commercial Action
Consider whether you can agitate any other aspects of the contractual relationship for the other party to take your demands seriously. For example, if the other party is still relying on you for any services or information, consider whether there are grounds to halt the provision of services pending the resolution of the situation.
3. Continually Gather Evidence
You should always keep a record of and gather evidence of the other party’s conduct while pursuing other forms of action. This will assist with adding further evidence to your arguments that the party is in breach of the contract.
Legal Action You Can Take
Issue a Formal Letter of Demand
Consider having a lawyer draft and issue a letter of demand on your behalf. The added pressure and formality may compel the other party to cease their conduct. This step is also important in the overall context of your dispute to ensure that you have a clear line of evidence that you have exhausted all attempts to resolve this issue before taking legal action through the courts.
Commence Proceedings to Enforce the Restraint of Trade Clause
If all other options have proven unsuccessful, you can consider applying through the courts to enforce the clause on the other party. Note that this option is costly and does not guarantee an outcome in your favour.
Seek an Injunction
An injunction is a court application by which a party will seek an interim/temporary order against another party. You might consider this option if the party’s conduct is or is about to cause substantial damage to your business. However, this option is costly and highly complex.
With any applications to the court, we strongly recommend you seek advice from a lawyer before commencing this approach.
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Key Takeaways
Breaches of a restraint of trade clause can significantly impact your business if not dealt with properly. As such, it is essential you exercise your contractual right to protect your commercial interests.
If you have any questions concerning a potential breach, our experienced dispute resolution lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Typically a restraint of trade clause will include either a non-solitication or non-compete provision that restricts a party’s conduct during and after the contractual relationship.
You should start collecting all evidence of the party’s conduct demonstrating their breach of the clause. You should then contact the party and put them on notice that they have particular restraint of trade obligations under the contract and that you have identified conduct that may amount to a breach of their restraint trade obligations. After this, you can demand that they cease the conduct by a particular time/date.
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