Healthy competition is inherent to the very nature of the commercial world and yet businesses will always seek loopholes to bypass the competition and find a way to restrain it. This week, we are going to focus on restraint of trade clauses in commercial agreements.

First, it is important to note that there are different kinds of restraint of trade clauses. These include non-compete clauses for employees, business partners, as well as non-disclosure clauses preventing distribution of certain information. Non-disclosure clauses may apply to employees, as well as business partners. Usually, whether the commercial agreements seeking to restrain the action are ‘reasonable’ becomes the main issue.

Preventing abuse of the restraint clause

Whether a particular restraint clause is reasonable depends on the various circumstances of each individual case. Some deciding factors may include the length of time during which the clause is to be enforced, as well as the size of the geographical area where the clause is to have power.

In determining the ‘reasonableness’ of a restraint clause, it is also important to consider the public interests in addition to those of the parties involved.

The Federal Court of Australia recently considered this very question as related to a franchise agreement in the matter RPR Maintenance Pty v Marmax Investments.

The court considered whether a franchise agreement requiring several restraint periods of 10 years was reasonable and fair.

The court viewed the several restraint periods as fairly standard in commercial agreements. However, the judges found the period of 10 years to be unreasonably harsh. The court further reasoned that a restraint period should not outlast the life of the commercial agreement, especially as in this matter where it was not certain that the commercial agreement would be renewed.

While this case dealt with franchise agreements, it is a strong precedent for any commercial agreement discussion and in the future business owners and employers should be more careful with the level of severity of restraint clauses. In some circumstances restraints can be against the law because it is in conflict with the Competition and Consumer Act 2010.  The doctrine renders provisions which impose restrictions on a person’s freedom to engage in trade or employment illegal and therefore unenforceable at common law unless they are demonstrated to be reasonable. The provision must be reasonable both in the interests of the parties and in the interests of the public.

What Should I Do Next?

Contact us if you would like further legal advice on restraint of trade clauses in commercial agreements.  Our lawyers at You Legal will be happy to assist you in whatever way we can.

* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.