Restraints of Trade

Understanding Restraints Of Trade

Restraints of trade are a common feature in agreements for the sale of businesses and employment contracts. However, the considerations for each scenario are different.

The basic idea is that people should be free to do business. Therefore, restraints of trade are usually not allowed unless there’s a good reason. Valid reasons include protecting a business that’s being sold and keeping an employer’s interests safe when an employee knows important information and has relationships with clients.

A well-drafted restraint of trade clause should be reasonable. Also, it should not do more than needed to protect the legitimate interests at stake. In Queensland, if these rules are too broad or strict, may be deemed void. So, it’s important to make these rules carefully. They should clearly explain what activities are restrained, how long the rule lasts, and what areas it covers.

Common Drafting Errors in Employment Contracts

Overly Broad Client Restrictions: Restraining contact with any client, even those the employee has never interacted with.
Unnecessary Business Restrictions: Prohibiting any business dealings with clients, instead of just competitive activities.
Excessive Geographical Areas: Applying a restraint across all of Queensland when the employee only served clients in Brisbane.
Excessive Duration: Imposing a six-month restraint in a fast-paced industry where a shorter period would suffice.
Unreasonable Activities: Imposing restraints that unduly prevent the employee from earning a living.

Restraints in Business Sale Contracts

In business sales, restraints of trade are often structured as cascading restraints. These combine various activities, geographical areas, and durations into multiple, separate restraints. This ensures that if one part of the restraint is deemed too broad, the other parts remain enforceable. Some contracts, like the standard Business Sale contract, allow the buyer to specify lesser restraints to ensure enforceability.

Since the seller of a business receives goodwill payment, restraints in business sale contracts are more likely to be enforced. However, overly restrictive restraints on employees that prevent them from earning an income are often considered excessive and void.

Legal Expertise in Restraints of Trade

Our Gold Coast business lawyers know a lot about this topic and other competition issues. They also deal with court cases in these areas. They handle matters related to what employees and former employees can and can’t do, especially when it involves confidential information.

For expert advice from restraints of trade lawyer, contact Justin Mathews or Peter Muller at 07 5575 0111.