Enforceability of restraint of trade clauses

Are Restraint of Trade Clauses Enforceable ? Is a restraint of trade clause enforceable? What is a restraint clause? Author Tracey Dickens.

Strictly speaking, restraint of trade clauses are not fully enforceable.

Under the common law doctrine of restraint of trade clauses, such clauses are presumed to be void and unenforceable as contrary to public policy. To ensure that your legitimate business interests are protected and that any restraint of trade clauses are effective and enforceable, it is important that: your employees’ employment contract is valid and effective , and that it is reviewed regularly and updated to reflect the. This entails that the party to the contract in which such a restraint of trade clause is present , can only claim that it is not enforceable , if he is able to prove that the clause is in fact , against public interest.

This is however, not as easy as it sounds. This presumption may be rebutted however if the employer can demonstrate the existence of special circumstances which establish that the restraint clause is reasonable and is not unreasonable in the public interest. The enforceability of restraint of trade clauses in employment contracts has always been a hot topic of debate in law.

However, what once was a stringent clause to be abided by the Employee when the employment relationship terminated for whatsoever reason has now been raised by many Employers and Employees during the nationwide lockdown due to the COVID-pandemic.

The High Court was prepared to make a substantive determination of the enforceability of the clause without waiting for trial, in the context of striking out applications brought by the Defendants in that case. A restraint of trade clause may, therefore, be imposed to prevent an employee, director, partner, etc. The purpose of a restraint of trade clause is to protect a business interest.

In the employment context, restraint of trade clauses are usually used to prevent employees or directors leaving and immediately joining a direct competitor. However, in the commercial context, restraint of trade clauses can be much wider reaching. Restraint of trade clauses continue to grow in popularity as the rise of freelance workers encourages employers to protect their goodwill. Many modern employment contracts contain restraint of trade clauses to the following effect:-1.

For instance, the buyer may wish to prevent the seller entering the same type of business in the same geographical location for a certain period of time. Employers should be careful about drafting con-compete clauses that seek only to insulate them from competition. Generally, a restraint will not be enforceable unless it is targeted to the protection of the employer’s confidential information or trade secrets.

A clear example of an enforceable restraint of trade concerned a barista working for a Wellington coffee company, Fuel Espresso. The barista entered into an employment agreement that contained a restraint of trade preventing him from setting up in competition within 100m of the employer’s coffee outlets within three months of leaving. When considering whether a restraint is reasonable, the Courts take into account. The main findings of the Court of Appeal, which were unanimous, included the following: 1. The restraint clause in the employment contract was not void for uncertainty.

It was clear that the various restraint.

Their purpose is to protect a party’s confidential information and business (including client relationships) from being used by a former associate (such as an employee, franchisee or vendor) after the contract ends. However, a court may decide to enforce a restraint of trade clause if it: is not contrary to the public interest. If these criteria are not met, the restraint of trade clause will be void and unenforceable. At common law, restraint of trade clauses are contrary to public policy and are generally unenforceable. In NSW however, such clauses are not prima facie void and are only valid to the extent to which it is not against public policy.

This protects the employer’s trade secrets, confidential information, and customer and staff relationships. Typically, employees are restrained from soliciting clients or establishing competing businesses. Any restraint of trade is unlawful unless it falls within one of a number of lawful exceptions. Ltd Ltd NSWCA 2has confirmed cascading restraint of trade clauses in employment contracts can be validly enforced and are not contrary to public policy.

Each case will be determined based on its own set of facts.