Restraint of Trade Clauses: Protect the Cash Flow and Confidentiality of Your Business
Restraint of trade clauses are a useful tool for protecting the cash-flow and confidential information of the employer. They are commonly found in employment contracts, often disguised by a different title, e.g. ‘no competition’, ‘non-solicitation’, ‘no poaching’ or ‘confidentiality’ clause. They generally seek to prevent an employee from working for or setting up a competing business within a certain distance from the employer’s business premises during the employee’s period of employment and for a certain period of time afterwards. Used effectively, a restraint of trade clause can limit an employee’s current and future employment and business opportunities to the advantage of the current employer.
If you’re a business owner and your business is offering to the world something worth paying for then chances are that that ‘something’ is worth protecting. Consider inserting a restraint of trade clause within your employment contracts but make sure your solicitor drafts it for you or, at the least, fine tunes it for you. A restraint of trade clause that is unreasonable may be unenforceable.
As a means of dealing with the risk that a restraint could be deemed unreasonable and unenforceable by a Court, lawyers now frequently draft restraint of trade clauses in a cascading form, beginning with a broad restraint and then offering, in the alternative, various narrower restraints to fall back on.
A cascading restraint of trade clause was recently considered by the Supreme Court of Queensland in Auto Parts Group Pty Ltd v Cooper [2015] QSC 155. Justice Bond in that case upheld the validity of the broadest restraint in the cascading restraint of trade clause, making orders preventing the two former employees in question from working for a competing business for six months throughout Queensland after their employment ended with Auto Parts Group Pty Ltd (APG).
His Honour reiterated the general principle that a restraint of trade is prima facie invalid but may be enforced if it affords no more than reasonable protection to the party in whose favour it is imposed and is not injurious to the public. The need for the restraint to operate to protect a legitimate interest of the employer was also emphasised.
APG’s success against its two former employees can be partly attributed to the careful drafting of its restraint of trade clauses and employment policy. It can also be attributed to the fact APG successfully illustrated to the Court that there was a risk of disclosure of confidential information by the two former employees and a risk of exploitation by the two former employees of relationships with APG customers developed during the employees’ employment with APG. The Court found that there was a ‘real and sensible possibility of the misuse of the information’ sufficient to justify the Court’s orders.
Employers should also note that it is appropriate to regularly review your restraint of trade of clauses, even if your lawyers have drafted them, particularly where there has been a change in the nature of your business.