Restraint Of Trade Clauses (Vic)
A restraint of trade is a clause in a written contract that restricts one party’s ability to trade. Restraints of trade are most commonly found in contracts for employment, to prevent the sharing of trade secrets or other confidential information, and for the sale of a business, to restrict competition. Victoria does not have specific laws covering restraints of trade, but case law and the Commonwealth Competition and Consumer Act 2010 determine the principles of such clauses.
All restraint of trade clauses are void unless they are reasonable in the interests of the parties or the public. In assessing reasonableness, the court will firstly consider whether there is a legitimate interest that needs protection, then assess whether or not the restraint does no more than is necessary to protect the interest. If the restraint goes beyond what is necessary, it will not be considered reasonable.
The onus is on the party imposing the restraint to prove that the restraint is reasonable to protect a legitimate interest. The party being restrained can argue the restraint is unreasonable in the public interest. What is reasonable will be determined by assessing factors such as:
- geographical area;
- activities to be restricted;
- the negotiation process;
- the nature of the business and the characteristics of the employee;
- remuneration and compensation for the restraint;
- whether the clause will affect a person’s ability to earn a living;
- bargaining power between the parties.
A court will consider the reasonableness of the restraint at the time the contract was entered, not when the matter is in court. However, the events and the extent of the relationship between the parties since the contract was entered will still be relevant to its determination. A court has an option to “read down” a restraint if it would otherwise be unenforceable. This allows the court to enforce a restraint to a limited extent when enforcing it to the full extent would be unreasonable.
Types of clauses
There are several types of restraint of trade clauses, restricting different activities.
Most restraint of trade clauses operate when employment has ended, and restrict competition or solicitation. The clause can prevent the ex-employee from:
- soliciting current or former clients or customers;
- “poaching” employees of the former employer;
- revealing or using confidential information or trade secrets gained during their employment;
- working for a competitor or starting a business which competes with the former employer’s business.
Contracts for the sale of a business
A restraint of trade clause related to the sale of a business can prevent the seller from operating a similar business within a certain geographical area for a specific period of time.
Restraints of trade have a common feature in that they are agreements about competition, and this can be problematic when it comes to “cartel conduct” provisions in the Competition and Consumer Act. Under the Act, a corporation must not form a contract with a competitor that contains a cartel provision, which is a provision that relates to:
- price fixing;
- restricting outputs in the production and supply chain;
- allocating customers, suppliers and territories;
- bid rigging.
A provision is deemed to be a cartel provision if it has the purpose or effect of directly or indirectly:
- limiting the supply or potential supply of goods and services;
- limiting the acquisition or potential acquisition of goods and services;
- allocating geographic areas in which goods and services are to be supplied or acquired.
The Act states the Act “does not affect the operation of the law relating to restraint of trade in so far as that law is capable of operating concurrently with this Act”. Restraints of trade are usually exempt from cartel conduct provisions but there is no general exemption, and whether a restraint falls foul of the Act will depend on the parties and the activities the restraint seeks to limit.
Ladder or cascading clauses
Parties can draft restraint clauses of varying levels of restraint, so that if one or more restraints are found unreasonable, others may survive. However, there is the risk that the court may determine that the parties did not make a genuine attempt to define the protection, or that the clauses were too uncertain to have been agreed upon.
Enforcing a clause
Usually if a contract or deed contains a restraint of trade clause, it will also state the remedy for a breach of the clause, such as that the affected party can seek an injunction as well as compensation for damages caused by the breach.
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