Restraint of trade, or non-competition clauses as they are more commonly referred to, come in all shapes and sizes. Generally speaking there are three primary types of restraint of trade clauses, namely:
- non-competition and non-solicitation clauses;
- exclusive service clauses; and
- garden leave clauses.
In this article, we look at non-competition and non-solicitation clauses and for ease of reference, refer to such clauses as restraint of trade clauses.
Understanding Restraint of Trade Clauses
These types of restraint of trade clauses seek to prevent employees and contractors from competing with a trader’s business both during and after the termination of their engagement with the trader. Why? Employees and contractors often occupy a special position of privilege and power in that they are made privy to a businesses’ confidential information, intellectual property, processes, procedures and above all client information.
At a fundamental level, a businesses’ viability lies in its ability to acquire, grow and sustain sales (generate revenue). A reality which is only made possibly via the cumulative effect of the businesses’ back and front end operations, or more specifically all the factors just mentioned. It goes without saying that access to such important business knowledge and knowhow would enable an even less than savvy individual to replicate your systems, undermine your business offering and solicitor your client base, thereby striking at the heart of your businesses’ sustainability. As such, it is only natural that traders would want to protect themselves against such unscrupulous activities that are aimed at usurping or disrupting their business operations.
In particular restraint of trade clauses can assist a business to guard against the:
- solicitation and poaching of current and former clients and customers;
- solicitation and poaching of current and former employees, contractors, agents and affiliates;
- the disclosure of trade secrets and other types of confidential information; and
general activities that are directly in competition with the trader’s business offering.
Enforcing a Restraint of Trade Clause
Having said that, not all restraint of trade clauses are created equal. Just because a restraint of trade clause has found its way into an offer of engagement or otherwise, does not mean that it will be deemed to be valid and/or enforceable. Such clauses will only hold weight if they are necessary to protect the legitimate business interests of the trader.
In examining the public policy debate and the requirement of reasonableness, it has been held that as a matter of course, it is against public policy to impose a restraint on the liberty of a man and hinder his ability to earn a living and exercise his trade or calling. An exception applies in instances where there are special circumstances which justify the restraint (McHugh v Australian Jockey Club Ltd  FCAFC 45 at 4). To put it another way, a restraint of trade clause will only be held to be valid if it is reasonable having regard to the interests of the public (Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd  AC 535 at 565).
Whether or not a restraint of trade clause is reasonable is ultimately a question of law not fact. Nevertheless, the following factors are relevant in making a determination:
- the size and nature of the industry;
- the nature of the restrainee’s role;
- the scope, breadth and length of the restraint;
- the time of the restraint;
- future probabilities that could have been foreseen by the trader;
- the effect of the restrain on the restrainee’s ability to earn a wage;
- the bargaining power of the contracting parties; and
- the effect on the trader’s business should the restraint be held to be unenforceable.
It has been held that a covenant in restraint of trade will not be reasonable if it is imposed for the sole purpose of protecting a trader against potential or anticipated competition, something more is required (Lindner v Murdock’s Garage (1950) 83 CLR 628). What amounts to “something more” will depend on the facts of the particular case. However, there is no doubt that protecting customer connections and confidential information is a recognised category of legitimate interest and as such can be protected via a restraint of trade clause.
The Bargaining Power of the Contracting Parties
In any bargain or deal struck, the balance of power vis-a-vis the parties is inherently unequal; that is the nature of commercial dealings. Accordingly, when we speak of the bargaining power of the parties, we do so with a certain level of generality. Gross inequalities in bargaining power will certainly be a consideration in determining the reasonableness or otherwise of a restraint of trade clause. In fact, such gross inequality may be indicative of vitiating factors outside of the field of covenants which are in restraint of trade i.e. unconscionability and/or undue influence.
Having said that, where the parties have not been on unequal bargaining terms and there is nothing to suggest deception or unconscionability, the fact that the parties have voluntarily agreed to the restriction imposed by the restraint of trade will certainly be a factor in support of the reasonableness of the covenant.
Scope and Breadth of the Restraint
Most restraint of trade clauses are deemed to be invalid because they are unreasonable (in that they do not protect a legitimate interest of the party in whose favour the clause has been drafted) or they are so wide as to be unenforceable. Not much can be done in terms of the former, however, the clause can be made sufficiently narrow in its breath of operation so an not to be invalidated upon the latter ground. Accordingly, when drafting a restraint of trade clause it is important to consider and limit as far as practicable:
- the scope of the restricted conduct;
- the geographic reach of the covenant; and
- the length of the covenant.
If you have questions about restrictive covenants or require assistance in drafting or reviewing an employment contract, get in touch with our employment lawyers.