Are Restraints of Trade Worth it?
“A restraint of trade is not worth the paper it is written on”. This is a common phrase that we hear from our business owner clients who have usually discussed a restraint of trade with their neighbour or a person at a barbeque. The truth is that a restraint of trade may be binding against the restrained party if it protects the legitimate business interests of the person or business that it is protecting.
There are a variety of different forms of restraints of trade including, the employer/employee relationship, business sale agreements, partnership agreements and other specific deeds of restraint. The main types of restraint are a restraint for a period of time from:
- Working in a particular area or kilometre radius from the restraining parties business; and
- Doing work for a particular client or customer of the restraining business.
When dealing with a restraint of trade the general rule is that it is unenforceable unless the party seeking to enforce the restraint can show that it is ‘reasonably necessary’ to protect the ‘legitimate business interest’ of that party.
Over the years there have been a lot of arguments relating to whether restraints of trade are reasonable or not, many of these have been decided by the Courts. From these cases some of the general considerations that will be made in deciding whether a restraint of trade is enforceable are:
- Whether the clause actually protects the legitimate business interests of the person seeking to enforce the clause;
- Whether the clause is reasonable to protect the legitimate interests of the party seeking to enforce it;
- Whether the clause is attempting to simply preclude competition;
- The position of the parties in the negotiation (for example, it is more difficult to enforce a restraint of trade in an employer/employee relationship than a business sale agreement);
- What compensation is paid to the restrained party for the restraint of trade; and
- Whether the clause will stop the restrained party from being able to earn a living.
There is no ‘one-size-fits-all’ restraint of trade clause that every business can use. In many cases a reasonable restraint for one person within a particular business may be different to the other persons in that business. For instance, it would be more reasonable to have a broader restraint of trade for a professional person working with clients than it would be for a secretary/receptionist employee. Further to that, if a person is selling their business it is often reasonable for them to be restrained from competing with the business they sold to protect the goodwill of the buyer.
As such it is important when drafting these types of agreements that you obtain proper legal advice relating to the terms of the agreement. This will ensure that the restraint of trade is tailored to the specific situation of the parties involved and therefore should be considered to be reasonable.
At Streten Masons Lawyers we act for business owners in drafting employment contracts and also in dealing with the sale or purchase of a businesses from third parties. If you require any assistance drafting a restraint of trade clause or have any questions relating to the enforceability of such a clause, please contact one of our solicitors on (07) 3667 8966.