Are restraint of trade clauses worth the bother?

Have an expertly-drafted agreement

The Insurance & Financial Services Ombudsman office (IFSO) was established in 1995 to help consumers who were in dispute with their insurers or financial Restraint of trade clauses are common in the sale and purchase of a business and in some employment agreements. In a business context, they offer protection to a buyer who has acquired a business and prevent the seller from directly competing against the buyer. A restraint provision in an employment context is designed to protect the employer’s business interests when key employees leave. There’s a general perception that these clauses are difficult to enforce, so why bother?

Non-competition restraint – sale of a business

The purpose of a non-competition restraint in regard to the sale of a business is to ensure that the purchaser is able to retain the benefits of the business they have purchased including existing and potential customers. It prevents the seller from establishing, working for or being involved in a similar business. Non-competition restraints are routinely used in the sale and purchase of businesses.

Non-competition restraint – employment agreement

The first consideration before inserting a restraint of trade clause in an employment agreement is to decide whether or not you, as the employer, have a proprietary right (be it trade connections or trade secrets) which might be considered reasonable to protect. The effect of a restraint in an employment agreement is to prevent your employee from working for a competitor or opening a competing business immediately after their employment ends. Due to the restriction placed on any employee’s livelihood, the necessity for the restraint (which will benefit you as their employer) must be balanced against your employee’s right to earn an income (a restriction for your employee).

Is the restraint reasonable?

In determining whether a restraint of trade is reasonable, the courts will consider the following factors:

  • Do you as an employer have a proprietary interest (trade or customer connections) capable of protection?
  • Is it reasonable that your employee be restrained from the specified activities?
  • Is the period of the restraint reasonable?
  • Are the geographical limits of the restraint reasonable?
  • What compensation was given to your employee in exchange for them agreeing to be restrained after the end of their employment?

The larger the geographical area and the longer the time restriction, the more likely a restraint of trade will be considered unreasonable.

Is it enforceable?

Absolutely – if the restraint of trade clause has been carefully and correctly drafted according to the specific circumstances of the employment environment and relationship. If it is unnecessarily restrictive, it is more likely it will be unenforceable. The courts have considerable power to delete the restraint, modify it to make it reasonable or deem it unenforceable.

There are also a number of alternative ways you can protect your business, including non-solicitation, confidentiality, intellectual property and confidential information – perhaps articles for another day!

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