Restraint of trade clauses can apply to shareholders, employees, directors, contractors and other individuals that do work for, or offer services to, a company.
What is a 'restraint of trade' clause?
Often agreements will contain a restriction on parties who leave a company or business from:
- competing with the business or a similar business;
- soliciting employees and customers of the business;
- interfering with the relationship between the company and its customers,
and more. This is called a ‘restraint of trade’ clause.
What is the aim of a restraint of trade clause?
These clauses aim to protect the legitimate business interest of a company by preventing certain persons from using information (e.g. trade secrets) they obtained while working for the company for use in another business. These clauses are not aimed at reducing competition in the market or preventing a former worker from earning a living.Â
Do I need a restraint of trade clause to protect my business?
Whether you need a restraint of trade clause depends on the individual worker and your business. Take the following examples:
- if you operate an accounting firm and a partner responsible for bringing in work wants to leave;
- if your business develops a product and a key developer wants to leave; or
- if shareholders are privy to confidential information and a majority shareholder exits,
then you might want to consider including a restraint of trade clause in your agreements with these individuals. In contrast, a restraint of trade clause would not be appropriate for a retail shop assistant.
Lastly, there is a court process for enforcing restraint of trade clauses so just because you have this clause, it does not automatically result in the clause being valid and enforceable. Courts will take into consideration the restraint of trade clause and the specific circumstances of its intended application to determine whether it will protect the legitimate business interest of a company, so it’s important these clauses are carefully constructed to increase their chances of being enforceable.
If you need assistance with a restraint clause, please contact our business team on 07 3224 0265.
