A restraint of trade is a clause in a contract or agreement that restricts one party from engaging in conduct with another person or business that is not a party to that agreement. These restraints are commonly found in certain types of contract, for example, a contract for the sale of business or an employment agreement.
The operation, including the validity and voidability, of restraint of trade clauses are largely governed by the Competition and Consumer Act (including the Australian Consumer Law) (the Act) and for NSW the Restraints of Trade Act. However, section 51 of the Act, excludes the operation of the Act in relation to employment, partnerships and sales of business.
For the most part, other than those who are in business, you are most likely to encounter a restraint of trade clauses in an employment contract. These clauses usually prevent an employee from engaging in certain activities during their employment and restrain their activity in the industry / profession after their employment. These clauses take different forms including:
- Non-competition clauses;
- Non-solicitation clauses; and
- Confidentiality clauses.
Non-competition clauses may prevent employees and former employees from working for certain competitors, or within a certain time period and distance from the business. The restraint usually applies both during the employment and for a period after.
A non-solicitation clause will prohibit a former employee from soliciting or enticing their previous employer’s clients to follow them or reduce the level of business they do with the previous employer.
Confidentiality clauses prevent current and former employees from disclosing the confidential information of the business to third parties. This obligation lasts as long as the information itself is confidential and after you have ceased being an employee.
The law in this space must manage the competing interests of allowing parties to engage in free trade and protecting business’ legitimate interests. Courts have taken the position that the party seeking to restrain bears the onus of proving the reasonableness of the restraint. Alternatively, the restrained party may also attack the restraint on the basis that it is against public policy.
Please contact Walker & George to provide advice on any restraints that you may be agreeing to or are subject to.