The validity of a restraint of trade is that which is reasonably necessary to protect the legitimate interests of the person seeking to enforce it. The approach of the courts for determining the issue of reasonableness for drafting and enforcing restraints of trade and the consequent implications, is useful for gauging whether or not an employer’s restraint is likely to be enforceable.

Restraints of trade are used to protect trade secrets and confidential information, employee or staff connections, or customer connections provided the restraints are reasonable. If you are an employer, proper consideration should be given to including restraints of trade (which are reasonably necessary to protect legitimate interests) in appropriate employment contracts.

Drafting Restraints of Trade

Importantly, the restraints should be drafted to allow for possible future developments. An employer may lose protection over types of confidential information or against competition if the restraint clause is drafted too narrowly. For example, by referring to only current technologies. This is why it is important to engage an appropriately qualified legal professional to ensure your business’ interests are protected. It is vital that relevant terms are used in contracts which ensure their broad potential application in consideration of possible future developments in technology.

It is vital an employer anticipating restraining an employee once the employment relationship has come to an end considers the use of a carefully drafted clause at the point of engaging that employee. If the employee’s role is later varied, a restraint of trade clause must be expressly contained in a new contract setting out the terms and conditions applicable to their new role in the business. Importantly, restraint of trade clauses are not and will not be automatically implied into a contract of employment. An example of this is where there is a transfer of business and the employer’s identity changes. It is critical to ensure new employment contracts are executed which include reasonable restraints.

To increase the potential for enforceability, restraints should be carefully drafted. Generally, restraint of trade clauses include what are referred to as “cascading” provisions or “step clauses”, and these will offer the most protection. The courts accept such clauses if they are properly drawn.

 

Enforceability

Some key tips to increase enforceability of a restraint clause include:

  1. Being reasonable about the geographic area, time period and scope. For example, if the restraint seeks to limit the solicitation of clients or customers, the clause should be restricted to restraining only those clients or customers with whom the employee has had some connection.
  2. Be specific when identifying the legitimate interest/s you are seeking to protect. For example, if it is trade secrets, it may be prudent to list examples of those trade secrets which the restraint is seeking to protect (whilst also allowing for potential future developments).
  3. Consider whether consideration (a payment or reward) could be offered to an employee in exchange for agreeing to the restraint. This may assist in demonstrating its reasonableness if required by a court.
  4. Importantly, ensure the employee understands the meaning of the clause and seek independent legal advice regarding the clause and the ongoing obligations/restrictions it imposes on them.
  5. Where a cascading clause is used, be wary that these limit possible variations to the clause. Ensure the completed clause states that each cascading provision is intended to operate as a separate and severable restraint that applies cumulatively.

 

How can we help?

If you would like assistance regarding a restraint of trade, or other employment or contractual matter, contact our office today on (07) 3036 0649 or email tracey@robinsonnielsen.com.au.

This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this update to specific issues or transactions. For more information or specific advice on your circumstances please contact tracey@robinsonnielsen.com.au.