A restraint of trade is any contractual term which seeks to restrict the freedom of a party to engage in business. Restraint of Trade clauses provide means for employers and partnerships to prevent a departing employee or partner from taking clients or competing with the business for a period of time after they leave. Often restraint clauses provide that an employee will not:

• Approach, canvass or solicit any clients or customers of the employer for a period of ‘X’ months, or
• Use or disclose confidential information after leaving employment, or
• Work for a competitor of the employer’s business for a period of ‘X’ months in Sydney.

These restraints are extremely important for companies that rely on client relationships. At LAC Lawyers we are specialists in advising and writing Restraint of Trade clauses, see us today to have one inserted into your employment or partnership agreement or call LAC Lawyers today on 1300 799 888 (Sydney) or 1300 734 638 (Melbourne).

Generally Courts will only enforce restraint clauses if they are ‘reasonable’. In NSW, the Restraints of Trade Act, 1974 allows a court to ‘read down’ the terms of a restraint clause to modify it until it is reasonable.

The employer or company seeking to enforce the restraint has the onus of showing that it goes no further than what is reasonably necessary to protect the employer or businesses legitimate business interests. If a court finds that a restraint goes beyond what is reasonable to protect the legitimate business interests of an employer, then the restraint of trade clause will not be enforced against an employee.

Whether a restraint of trade clause is enforceable (or deemed ‘reasonable’) depends on a number of factors. At general law, the courts will consider the following:

a) the interests of the employer capable of protection (this includes a consideration of the nature, locations and goodwill of the employer's business and the location of the employer's clients);

b) the nature of the work of the employee being restrained, including the employee's seniority and the nature of the employee's role and duties including the level of contact the employee has with clients;

c) the scope and duration of the restraint (including the time and area proposed to be covered by the restraint) - in a recent decision, a clause which restrained, for 12 months after termination of employment, two senior employees (a Chief Executive and Chief Technology Officer) from competing with the employer's business or soliciting clients after their employment ended was valid and the employees were ordered to pay damages for the loss suffered by the Company flowing from their breach of the restraint of trade clause (Ross an Anor v ICETV [2010] NSWCA 272);

d) Benefits to the parties from entering the restraint; and

e) the bargaining position of the parties.

Recently there has been a trend where employers seek to include cascading restraint of trade clauses in contracts. Cascading clauses contain a series of restraints that overlap. By doing this any restraints that are held to be unreasonable and unenforceable can be severed and the employer can enforce the remaining restraints. Recently, a cascading restraint of contract clause, which contained nine separate restraints, was upheld with the New South Wales Court of Appeal finding that the minimum restraint period of 12 months throughout Australia was reasonable to protect the employer's legitimate business interests (Hanna v Oamps Insurance Brokers Ltd [2010] NSWCA 267).

For more information, call LAC Lawyers today on 1300 799 888 (Sydney) or 1300 734 638 (Melbourne).

If you have a contract with another party which contains a restraint of trade clause, and the other party breaches the restraint, you should contact the professionals at LAC Lawyers to assist you with the following steps:

1. Satisfy yourself that the restraint is actually being breached. Do not rely on hearsay from others. 
2. Try to obtain evidence of the breach. This will be very important if you need to take court action. It is best to obtain this evidence via independent parties, for example your solicitor or a private investigator. Evidence can be obtained by “devious means”, provided they are not illegal. For example, make a telephone call to see how the calls are being answered, send someone in to a shop to ascertain what is being sold and to buy samples (remembering to keep the receipt!), even get photographic or video evidence.  
3. Write a letter of demand to the other party. The purpose of the letter is to put the party on notice that they are in breach of the restraint and to give them an opportunity to rectify the breach by ceasing the offending activity. You can put a very short deadline on such a demand, because of the urgency of the matter. In some cases, a few hours will suffice.   

The three available remedies for breach of a restraint clause are:

1. an injunction, which is a court order preventing the party from continuing the activity which is in breach of the restraint; 
2. damages, to compensate any loss you suffer as a result of the breach; and 
3. an account of any profits made by the party in breach.  

If litigation becomes necessary, it is absolutely essential that you move quickly. You should instruct the professionals at LAC Lawyers as a matter of urgency at this point. Any substantial delay will make it less likely that you will be able to obtain an injunction, which is the most effective means of protecting your goodwill. For more information, call LAC Lawyers today on 1300 799 888 (Sydney) or 1300 734 638 (Melbourne).

A properly drafted restraint of trade clause for an employee is an effective tool to protect an employer’s legitimate interests from competition by an ex-employee. A properly drafted restraint clause is capable of enforcement where as a poorly drafted or inappropriate restraint clause will leave an employer with little comfort. Call LAC Lawyers today on 1300 799 888 (Sydney) or 1300 734 638 (Melbourne) for more information and legal advice.

The following is a selection of LAC Lawyers' team of experienced employment lawyers ready to defend you.

• Mark Bostock, Industrial Relations Lawyer Sydney
• Alexandra Egan, Industrial Relations Lawyer Sydney
• Michael Pickering, Industrial Relations Melbourne
• Patrick Mulligan, Industrial Relations Melbourne