Drafting enforceable restraint of trade clauses

Introduction

Growing international research suggests that restraint of trade clauses are becoming more prevalent. However, the increased prevalence of these clauses raises questions as to their enforceability and practicality. The enforceability of restraint of trade clauses has gained traction following the Australian Treasury’s recent report which assesses the use and effect of restraint of trade clauses on Australian employees.[1]

Restraint of trade clauses come in a number of different forms including:

1.       non-solicitation clauses which restrain former employees from ‘soliciting’ or ‘persuading’ a company’s clients, business contacts or employees for their own gain, or for the gain of a new employer;

2.       non-compete clauses which prevent former employees from working for a competitor or establishing a competing business; and

3.       non-disclosure clauses which restrict former employees from disclosing confidential information gained during their course of employment.

 (Collectively, Restraint Clauses)

Despite 46.9% of Australian businesses reporting that they use at least one type of Restraint Clause, they are only enforced in 19.2% of cases. So it begs the question, why is it that the enforceability of Restraint Clauses is so low?

There are several factors which impact the enforceability of a Restraint Clause, including:

1.       the time and expense involved in enforcing a Restraint Clause;

2.       the ambiguity or uncertainty in the drafting of the Restraint Clause; and

3.       the reasonableness of the Restraint Clause.

‍Time and expense involved

Enforcing Restraint Clauses can be a lengthy and expensive process involving legal costs from engaging lawyers and commencing proceedings in the Supreme Court (jurisdiction for injunctions). Given the time and money involved in enforcing Restraint Clauses it is essential to consider whether pursuing the enforcement of these clauses is commercially wise - especially given there is no guarantee of success.

The most common remedy sought by employers enforcing Restraint Clauses is an injunction. An injunction may be granted by the court to restrain the continuing breach of Restraint Clauses in instances where the court finds these clauses are necessary to protect a business’ legitimate interests. Injunctions are a powerful tool for employers seeking enforcement of Restraint Clauses as the consequence of non-compliance with an injunction may lead to the breaching party being subject to prosecution for contempt of court.

Moreover, even when an employer is ‘successful’ and an injunction is granted, the restraint period may be over. Therefore, it is necessary for employers wishing to pursue the enforcement of Restraint Clauses to consider whether the grant of an injunction substantially outweighs the time and money involved in seeking the order. It is also necessary for the employer to consider that if an application for an injunction is dismissed, they may be ordered to pay the employee’s costs.

Practically, enforcing a restraint clause by injunction is a complicated process due to the inherent uncertainty of Restraint Clauses. Furthermore, it is often the case that the employee is at a disadvantage to the employer if proceedings are commenced.[2]

Reasonableness of the Restraint Clause

Central to the enforceability of Restraint Clauses is consideration of the ‘reasonableness’ of the clause itself. Restraint Clauses are generally enforced under the common law in Australia. Saving for New South Wales, the presumption at common law is that Restraint Clauses are void and unenforceable. However, this presumption can be rebutted if it is determined that the employer has a “legitimate protectable interest”, and the restraint is no more than reasonably necessary to protect the interests of the business.

When considering the reasonableness of a Restraint Clause, the court may consider:

• the duration of the restraint;
• the geographical extent of the restraint;
• whether there has been a restraint payment made to the employee;
• the activities it purports to control; and
• any other factor the court may consider relevant.

In making a determination on reasonableness, the Court may sever an unreasonable clause allowing for the rest of the clause to be a reasonable restraint. Because of this, Restraint Clauses adopt a “cascading clause” model where the restraint descends from most restrictive to least restrictive. Clauses of this kind bring uncertainty as to the details of the restraint for both the employee and employer.

Tips in drafting Restraint Clauses

Although there are many instances where Restraint Clauses are unenforceable, carefully drafted Restraint Clauses are useful for employers to help prevent former employees from engaging in activities which may undermine the employer’s legitimate business interests following the termination of their employment. The key to drafting valid Restraint Clauses is to ensure that the restraint is limited to what is reasonably necessary to protect legitimate interests.

Pragma Lawyers tips include:

1.       Avoid using generic or template restraint of trade clauses. The reasonableness of the restraint is assessed against the legitimate business interest, and as each business is different, the restraint clause should also be tailored to your business and the role of the employee;

2.       Be precise and specific on the type of conduct you are restraining and for how long;

3.       Consider whether or not a restraint payment would be appropriate; and

4.       Think twice about using generic non-compete clauses. 

Carefully drafted Restraint Clauses can protect your former employees engaging in activities which could undermine your business’s legitimate business interests following the termination of their employment.

If you are seeking advice or assistance regarding any of the above, you can reach out to our experienced employment law team here.

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[1] Australian Government the Treasury, Non- compete and other restraints: understanding the impact on jobs, business and productivity (Issues Paper, April 2024).

[2] Arup, Dent, Howe and Van Ceanegem, ‘Restraints of Trade: The Legal Practice’ (2013) 36(1) UNSW Law Journal 1, 24.