Restraint of Trade Clauses

What are restraint of trade clauses?

They are clauses in contacts used as a means of preventing departing employees or partners from taking clients or information with them or from competing with the original business after the termination of employment.

The courts generally dislike such clauses and are generally reluctant to enforce such clauses taking a restrictive approach to interpretation. The courts are mainly concerned with clarity and reasonability – an unreasonable or uncertain clause is most likely to be considered void or, where allowed by the law, reduced. It is therefore best to be careful when drafting such clauses as the legal onus to prove that the restraint is reasonable is on the one seeking to enforce the clause.

With this in mind, the following points should be taken into account in drafting such clauses:

• The interest to be protected. You should have a clear, well-defined, legitimate interest that needs protecting and the restraint should be limited to the protection of that interest.
• The type of business entity or activity that is to be restrained.
• The geographic area. The area covered by the restraint should be limited to that necessary to protect the interest.
• The duration of the restriction. The longer the duration of the restriction the less likely the courts are to find it reasonable. What is or is not reasonable is considered in light of the interest to be protected.

Case law:

Westec Security Services, Inc. v. Westinghouse Electric Corp. 538 F. Supp. 108 (E.D. Pa. 1982)
Hawkesbury Bakery Pty Limited v Moses (1965) NSWR 1242
Buckanara v Hawthorn Football Club Pty Ltd (1988)