When a person buys an established business, it is important to ensure that the previous owner of the business does not set up in direct competition with the business. Likewise, an employee or independent contractor might establish business relationships with clients, customers, suppliers and referrers of a business. In order to protect the business and prevent competition by former business owners or staff members, it is important to include a well-drafted restraint clause in the contract.
A restraint of trade or “non-compete” clause sets restricts a person or their associated entities from conducting certain types of business within a specified geographical area and within a certain time period. Restraint clauses are common in the following types of contracts:
- Business sale contracts;
- Employment contracts;
- Independent contractor’s agreements; and
- Shareholder agreements.
A restraint clause needs to be reasonable and necessary for the protection of a business’s legitimate interests. A restraint clause which is overly restrictive will be held to be invalid. This is because there is a strong public interest in ensuring that a person will be able to ply their trade and earn an income. It is not generally in the public interest to restrict a person’s ability to work. The three elements of a restraint clause that a Court will look at in order to establish whether it is reasonable and necessary for a business’s reasonable protection are:
- The area of the restraint;
- The duration of the restraint; and
- The type of employment or activity being restrained.
It is very important to set out each aspect of a restraint in different clauses of a Contract. This is because, in Queensland, if a restraint clause is not reasonable and necessary to protect a business, the entire unreasonable invalid. If so, the restraint clause will not form part of the contract. For this reason, restraint of trade provisions are usually set out in “cascading” clauses. An example of a cascading clause would be one which prevents a person from engaging in a certain type of work within the largest of the following geographical areas:
- Within Queensland;
- Within South-East Queensland;
- Within Brisbane;
- Within 10 km of the Business Premises; or
- Within 5 km of the Business Premises; and
For the longest of the following amounts of time:
- Two years;
- One year;
- Six months;
- Three months.
The restraint of trade clause would say that if any of the areas or timeframes listed in the clause is unreasonably excessive, it is to be deleted and the longest reasonable restraint period and the widest reasonable restraint area will prevail. A cascading restraint clause can be a useful way for the person seeking to enforce the restraint to hedge their bets and impose the broadest permitted restraint area and for the longest permitted amount of time, whilst minimising the risk that the clause will be invalid.
In considering whether a restraint of trade clause is reasonable and necessary to protect a business’s legitimate interests, a Court will also look at the type of future employment or enterprise which is being restrained. The former owner of a business, who has been paid valuable consideration by a buyer who has purchased the goodwill of the business, and who knows the business’s confidential information and has established relationships with the business’s clients and referrers will be more likely to have a broad restraint clause enforced against them than other types of employees. By contrast, it is unlikely that a restraint clause would be valid if it seeks to place restrictions on an employee who has no contact with a business’s clients and who does not have access to the business’s confidential information.
Restraint clauses, when drafted properly, can be invaluable in preserving the value of a business by preventing unfair competition by persons who possess that business’s confidential information. At Delaney & Delaney, our experienced commercial lawyers can assist you to help protect your business by preparing restraint of trade clauses which are tailored to your unique circumstances. This will ensure that the restraint clause will withstand any court challenge and be binding on the parties to the contract.
