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Restraints of Trade

Restraints Of Trade

Restraints of trade are commonly found in agreements for the sale of businesses and also in employment contracts, however different considerations apply in each of those circumstances.

The cornerstone concept is that there should not be a restriction upon an individual trading, and as such restraints of trade are or should be void.  But restraints can be valid where there is a good reason.  One good reason is the preservation of the goodwill in a business that a purchaser is buying.  Another is whether the duties of the employee are such that as part of the employment the employee forms bonds with the client and has access to the confidential information and knowhow of the employer which leaves the employer vulnerable to the employee exploiting the relationship for his or her benefit.

Any properly drafted restraint of trade clause should not go further than what is reasonably necessary to preserve the interest which is to be protected.  As such, in Queensland at least if a restraint clause is “over the top” or “wide” and contains obligations which are unnecessary, it may be void and fail.  As a result, it is necessary for restraints of trade to be drafted carefully so as to be reasonable in identifying restrained activities, a duration for the restraint, and generally an area in which the restraint is to apply.

Common errors in the drafting of restraints in employment contracts include:

  • having the restraint against contacting any “client” of the business post termination of the employment, when the employee may have never dealt with them or even know that they are a client;
  • having a restraint against doing any business with a client of the employer, rather than simply business which might compete with that of the employer;
  • having a geographical area which is too wide, as an example having a restraint for the whole of Queensland when the employee only ever dealt with clients in Brisbane;
  • having a restraint duration which is too long, as an example in a business where the customer might deal with the business several times in a month, then a restraint of 6 months might be too long;
  • having restrained activities which unnecessarily impede the employee from earning an income.

In contracts for the sale of businesses (or for the sale of shares where the membership of the company is being purchased) it is common for the restraints of trade to be drawn in a fashion known as a cascading restraint.  This will generally be several separate activities, which are combined with several separate geographical areas, and several separate durations, so that each are combined with the others as a separate restraint to the intent that any that are too wide can be severed but the remainder enforceable. Some restraints drawn in this fashion have literally dozens of separate combinations.  Other restraints – such as that in the standard Business Sale contract, are drawn to allow the Buyer to unilaterally stipulate lesser restraints so as to preserve a restraint which might otherwise fail.

Because a seller of a business is obtaining payment for goodwill, restraints in a business sale contract are more readily enforced – similarly the case when shares in a business operating company are being sold.  However overly restrictive restraints on employees which might prevent them from earning an income will often be excessive and void.

Our Gold Coast business lawyers are familiar with restraints of trade and restraints against competition, and litigation concerning them.  They are also familiar with related issues such as duties owed by employees and former employees to companies under the Corporations Act – which can operate as restraints particularly where information is being used – and breach of fiduciary duties.

For advice in respect of the enforcement of restraints, contact Justin Mathews or Peter Muller on 5575 0111.

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