Restraints of trade are not new to the law. English courts were grappling with them as early as the eighteenth century. They have also influenced other areas of law. Many believe that the legal attitude towards these agreements in part paved the way for modern consumer law. This article explains restraints of trade, where we find them and how the law treats them.
What is a Restraint of Trade?
A restraint of trade is a clause that restricts one party conducting business with another person or business not a party to the agreement. These restraints are commonly found in certain types of contract, for example, the sale of business or partnership agreements.
For example, the incoming proprietor of a small business may request inserting a clause prohibiting the outgoing proprietor from establishing a similar business within a certain geographical radius, for a particular period.
However, most Australians encounter restraint of trade clauses in their employment contract. These are typically express clauses in the contract itself preventing an employee from engaging in certain activities while in the employment of an entity. They may also endure after they have left that place of employment. These clauses take different forms including:
- No competition clauses;
- Non-solicitation clauses;
- No poaching/recruitment clauses; and
- Confidentiality clauses.
No competition clauses prevent employees and former employees from competing against their employer. The restraint usually applies both for the duration of their employment and a period after they have left.
A non-solicitation clause prohibits a former employee from soliciting an employer’s clients. Non-solicitation means more than merely preventing a former employee from initiating contact with the customers of their former employer. It prohibits them from actively engaging with and encouraging the employer’s clients to use their goods or services.
A no-poaching/recruitment clause mandates that former employees cannot offer employment to their former colleagues. These last for a set period and within a given geographical area.
Confidentiality clauses prevent current and former employees from disclosing the confidential information or trade secrets of their former employer. This obligation lasts as long as the information itself is secret.
Express contractual clauses, however, are not the only source of restraints placed on employees. Employees are usually also subject to implied restraints inherent in the employment relationship. These come from different kinds of duties implied into the employer-employee relationship and include:
- The duties of fidelity and good faith;
- The equitable duty of confidence; and
- Any relevant fiduciary duties.
In substance, these duties mostly perform much the same function and prevent the same kind of activities as express contractual clauses. For example, the duty of fidelity and good faith prevents, among other things, an employee from poaching employees or soliciting clients.
The law adopts the position that parties should be as reasonably free to trade or engage their services where they choose as possible. However, the common law does uphold some restraints, and these clauses must be ‘reasonable. It is typically the responsibility of the party seeking to restrain to prove reasonableness. For example, in the employment context, the onus of proving a restraint is reasonable rests with an employer.
A restraint of trade is reasonable when it protects a genuine interest. Further, it cannot protect that interest any more than is adequate and necessary. That is, the length of time that the restraint lasts, as well as the geographical area it includes, are not excessive and disproportionate.
Such a position means that a party wishing to insert a restraint into a contract needs to ensure that it is both moderate as well as tailored to their unique needs. If it is not, the clause itself may be unenforceable.
Regarding consumer law statutes, the Competition and Consumer Act 2010 (Cth) does not affect the common law doctrine of restraint of trade in so far as it does not conflict with the operation of the Act.
If you need assistance with reviewing your contract’s restraint of trade clause or have any questions, get in touch with our employment lawyers on 1300 544 755.