Restraint of trade in commercial contracts – towards a systemic understanding

Part 1

The restraint of trade doctrine has a long history with the judiciary resting somewhat uneasily between protecting the public’s right to free trade, verses an employer’s right to protect Legitimate Business Interests[1] (LBI).  Restraint of trade cases present an unusual mix of employment law and intellectual property issues for the courts to adjudicate.

The general rule unfortunately is that a restraint of trade clause in an employment contract is contrary to public policy and prima facie void unless it can be justified by the special circumstances of the particular case.[2]

Because of the evolution of the case law on this issue and the different commercial contracts in which a restraint of trade clause can be used, the circumstances where a restraint of trade clause is enforceable vary widely.  Compounding the issue is the apparent widespread misunderstanding about the enforceability and subsequent lack of a consistent nomenclature for describing the elements of such clauses.

The aim of this article it is address these issues in our first “multipart article”.

What is a restraint of trade?

A contract in restraint of trade was defined by Diplock LJ in Petrofina (Great Britain) Ltd v Martin [1966] Ch146 at 180 as one:

…in which a party (coventor) agrees with any other party (the coventee) to restrict his liberty in the future to carry on trade with other perons not parties to the contract in such manner as he chooses.

It is also commonly thought of as an interference with individual liberty of action in trading[3].  It is therefore possible for parties to a contract to include “restraint of trade clause” (ROT) in a variety of commercial contracts including:

(a)        contracts of service (Employment Contracts);

(b)        contracts for services (Contractor’s Agreements); and

(c)        business contracts (Commercial Contracts) of various kinds including but by no means limited to;

(i)          franchise agreements;
(ii)         sale of business assets;
(iii)        sale of  shares or other equitable interests in a business.

The distinction above is that the Courts are more likely to intervene in Commercial Contracts involving significant goodwill.[4]

Elements of Restraint of Trade clauses

It is usual for an ROT clause to contain the following elements which attempt to protect Legitimate Business Interests:

(a)        Trade Secret and Confidential Information Restraints[5];

(b)        Trade Connection Restraints:

(i)  Non-solicitation restraint of Clients; and
(i)  Non-solicitation restraint of Employees; and

(a)          By duration or term; and

(b)        By geographic area. (Non-Solicitation Restraint); and
(b)        Non-competition or competitor restraint (Non-Competition Restraint).

These elements are by no means the only mechanisms at the disposal of those wishing to protect their Legitimate Business Interests.  For example defining confidential information and trade secrets can be needs to be considered carefully in attempting to protect a Legitimate Business Interests.

The general rule

The general rule is that a restraint of trade clause is against public policy and subsequently unenforceable and prima facie void unless the restraint passes test of reasonableness.

Who has the onus of proving that the restraint is reasonable?

The onus of proving that the restraint is reasonable between the parties lies on the person making the allegation.[6]  The question of whether a restraint is reasonable is a question of law to be determined by a Court.[7]

What test is applied to determine whether a ROT clause is reasonable?

A ROT clause will be reasonable if:

…in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party whose favour it is imposed, while at the same time it is in no way injurious to the public.[8]

Put another way, according to Sackville AJA in Ross & Anor v IceTV [2010] NSWCA 272 at 86, the restraint must be:

  • reasonable in the interests of the contracting parties; and

  • reasonable in reference to the interests of the public

If you are an employer and would like advice on drafting and enforcing restraint of trade clauses in your contracts, please contact me for an obligation free and confidential discussion.

Brisbane LawyersMalcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
Telephone: (07) 3221 0013
e: mburrows@dundaslawyers.com.au   Follow me:  ITCorporatelaw

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.


[1] Lord Macnaghten in Nordenfelt v The Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565.

[2] Sackville AJA in Ross v IceTV Pty Ltd [2010] NSWCA 272 at 86.

[3] Lord Macnaghten in Nordenfelt v The Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565.

[4] Nordenfelt v The Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 536.

[5] Miles  v  Genesys Wealth  Advisers Limited [2009] NSWCA 25 (24 February 2009).

[6] Bacchus Marsh Concentrated Milk  Co Ltd (in Liq) v Joseph Nathan & Co Ltd [1919] HCA 18 at 34.

[7] Bacchus Marsh Concentrated Milk  Co Ltd (in Liq) v Joseph Nathan & Co Ltd [1919] HCA 18 at 34.

[8] Lord Macnaghten in Nordenfelt v The Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565.

 

 

 

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