Unless the restraining party can establish that the restraint is reasonable the restraint of trade clause will be void for being considered contrary to public policy. To be reasonable the restraint of trade clause must be reasonable in the interests of the parties and the public in all of the circumstances and be considered necessary to protect a legitimate interest of the restraining party.
Restraint of trade clauses often relate to restrictions on employment, in contracts for the sale of a business, and between business partners. Generally, restraint of a former employee is more likely to be considered unreasonable and therefore void than the restraint of a competing business in a sale of business or dissolution of partnership. Restraint clauses must be drawn carefully to reflect the relevant factual circumstances.
Protection against competition itself does not constitute a legitimate interest, however protection of trade secrets or business goodwill are considered by the courts to be legitimate interests the protection of which is reasonable in certain circumstances.
The courts consider it is in the public interest for a person be entitled to carry on their trade freely, or to use their skills, experience and know-how acquired whilst in business or employment with former business partners or employers.
Employees owe a duty to their employer during their employment not to compete with their employer, and not to solicit, deal or do business with clients of their employer. However, these duties end when the employment ends unless the employer protects its interests contractually using an appropriately worded post-termination restraint of trade clause.
Conversely, the duty not to misuse or disclose an employer’s confidential information does not end when employment ceases. Notwithstanding this duty, appropriately worded clauses protecting confidential information are important.
Restraint of trade clauses can be drawn to provide different levels of restraint (called ladder or cascading clauses) so that if one or more levels of the restraint clause are found to be unreasonable and therefore void, other levels may remain operative if they are reasonable. For example, a restraint in a sale of business for 100km for 5 years, or 50km for 2 years maybe held to be unreasonable, but an alternative of say 25km for 12 months may be upheld as reasonable. There is a risk that such ladder clauses can be considered uncertain and held by the Court not to reflect a genuine attempt to define a reasonable restraint by the parties and may be wholly struck out.
The circumstances relating to an employee’s termination will impact on the enforceability of a post-termination restraint clause. Relevant considerations may be whether an employee was summarily dismissed or whether the employee accepted the employer’s repudiation of an employment contract.
Where restraint of trade clauses found to be reasonable by the courts are breached, the restraining party can seek an injunction to enforce compliance and may claim damages or an account of profits.
Call Fleur Craig of Armour-Craig Legal on (03) 5636 4986 to discuss.