Explainer: Restraint of trade

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If you have ever signed an Employment Contract or sold a business it is likely that you have committed to some form of restraint of trade.

Restraint of trade clauses are usually found in Employment Contracts and Business Sale Contracts and aim to prevent the following:

• Employees from engaging in conduct that competes with their employer, either while they are employed or once their employment comes to an end;

• Sellers of a business from setting up another business that competes with the one that they sold;

• Inappropriate use of confidential information;

• Poaching of employees, clients, stakeholders, suppliers, contractors, and other people who are important to the protected party’s business.

Restraint of trade clauses in Employment Contracts usually restrict an employee from engaging in any conduct that competes with their employer’s business whilst they are employed, and stops them from working in or owning a competing business after their employment comes to an end within a specified geographical area over a specified period of time.

For example, a real estate agent’s restraint of trade clauses might say that an agent who resigns their employment cannot set up a competing real estate agency or work with any stakeholders with whom they had a relationship during their employment for a period of three months after their employment comes to an end in a geographical area of 10 kilometres from the employer’s principal place of business.

Restraint of trade clauses in Business Sale Contracts work in a similar manner and are aimed at ensuring that the purchaser gets all of the goodwill and reputation attached to the business they are buying without the vendor simply collecting the purchase price and setting up shop down the street, eroding the goodwill that the purchaser has paid good money for.

Drafting appropriate restraint of trade clauses is a delicate balancing act because NSW has legislation in place that allows a restricted/restrained party to make an application to the Supreme Court of NSW to read down or dilute restraint provisions in the event that they are arguably unreasonable.

There are lots of different cases that have been determined over the years to help us determine whether or not restraint of trade provisions are enforceable in different circumstances. By way of example, and referencing the real estate industry once more, an extremely long restraint of trade period for a real estate agent who resigns their employment that also prevents the agent from working in their local area will need to be carefully drafted to be enforceable because:

• Most local areas have dozens of real estate agencies all vying for listings, which means that the threat posed by one resigning employee is arguably fairly low;

• The case law has in the past indicated that it is difficult to restrain a person from earning a living in an industry in which they are trained in an area in which they live;

• There is often a perceived power imbalance between an employer and employee

• The law is also quite clear on misuse of confidential information and will protect an employer’s right to retain their data and business secrets.
See you next week.

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