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Jul 30, 2017
A restraint of trade is a clause that restricts one party conducting business with another person or business not a party to the agreement. These restraints are commonly found in certain types of contract, for example, the sale of business or franchise agreements.
Most people will encounter restraint of trade clauses in their employment contract. These are typically clauses in the contract preventing an employee from engaging in certain activities while in the employment of an entity and restraining their activity in the particular field after their employment. These clauses take different forms including:
- Non-competition clauses;
- Non-solicitation clauses;
- Confidentiality clauses.
Non-competition clausesprevent employees and former employees from competing against their employer. The restraint usually applies both for the duration of their employment and for a period after they have left.
- A non-solicitation clauseprohibits a former employee from soliciting an employer’s clients. It prohibits former employees from actively engaging with and encouraging the employer’s clients to use their goods or services.
- Confidentiality clauses prevent current and former employees from disclosing the confidential information or trade secrets of their former employer. This obligation lasts as long as the information itself is secret.
The law adopts the position that parties should be able to reasonably engage in free trade where they choose. However, the law does uphold some restraints, and these clauses must - in the eyes of the Court - be reasonable. It is typically the responsibility of the party seeking to restrain to prove such reasonableness. For example, in the franchise context, the onus of proving a restraint is reasonable rests with the franchisor.
A restraint of trade is reasonable when it protects a genuine interest. Further, it cannot protect that interest any more than is adequate and necessary.
If you have further questions, please contact us at frank@franklaw.com.au.
This is not legal advice.
